Question

1. If there were no transaction costs and property rights were always well-defined, there would be no external costs after trade.

a) False

b)True

2. How can selling a futures contract mitigate agricultural risk for farmers?

a) Futures contracts allow farmers to trade in crops whose prices will fall in the future.

b)Farmers can pin down a price for their produce even if there is volatility in market prices.

c)Farmers can grow crops that are not subject to weather inclemency.

d)Futures contracts allow farmers to store their grains in silos until the market prices rise.

Answer 1

1. b) True

The statement is true according to the Coase Theorem. According to the Coase theorem, when there are complete competitive firms with no transaction costs, an efficient set of inputs and outputs to and from production distribution will be selected regardless of how the property rights are distributed.

2. b) Farmers can pin down a price for their produce even if there is volatility in market prices.

Farmers can be insured against the fluctuations arising in the price of their market produce and hence there is a reduction in the chances of loss due to future contracts.