In World War II, a German POW camp guard exchanged bread and chocolate with prisoners at the rate of one loaf for one chocolate bar

Economics Dec 17, 2020

In World War II, a German POW camp guard exchanged bread and chocolate with prisoners at the rate of one loaf for one chocolate bar. Inside the POW camp, the price was 15 cigarettes per chocolate bar, and 40 cigarettes per loaf of bread. Is there an opportunity for beneficial exchange? Explain.

Expert Solution

There certainly is an opportunity for beneficial trade here. If 1 loaf = 1 chocolate bar, and 1 chocolate bar = 15 cigarettes, and 1 loaf = 40 cigarettes then beneficial exchange can occur as follows. If an individual had 1 chocolate bar and traded it for 1 loaf of bread, then traded 1 loaf of bread for 40 cigarettes, then traded 15 cigarettes for 1 chocolate bar. The individual that started with 1 chocolate bar ends up with 1 chocolate bar and 25 cigarettes. This trade sequence is why there is beneficial exchange in the system.

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