Question

Consider a fiat money/barter system like that portrayed in class. (a) Suppose that there are 4 goods in our economy, i.e., J = 4. Each search for a trading partner will cost you 3 units of utility, i.e., α = 3. In addition, the exchange cost when trading for a good directly or using money to purchase it are 2 units of utility, i.e., λ = 2. Find the maximum value of the exchange cost for money, λm, such that expected lifetime utility with money is at least as great as the expected lifetime utility under barter. (b) Now, suppose that J = 10 but that everything else stays the same. Find the maximum value of the exchange cost for money such that expected lifetime utility with money is at least as great as the expected lifetime utility under barter. (c) Briefly explain why λm increased after the number of goods increased to 10.

Answer 1

Solution for the above Problem

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