Problem 9 If you were on an island with 10... [FREE SOLUTION]

Chapter 12: Problem 9

If you were on an island with 10 other people and there were no money, do you think that money would emerge on the scene? Why or why not?

Short Answer

Expert verified

Based on economic theory, it is plausible that money or an equivalent standard medium of exchange may emerge to facilitate trade and overcome the inefficiencies of bartering. However, the outcome would be contingent on various factors, including the nature of the individuals, their needs, and their circumstances. There may also be cases where the group of individuals might prefer continuing with bartering or develop a communal system for distributing goods and services.

Step by step solution

Identify the Initial Setup

To start, it's important to understand the initial setup of the situation. You are on an island with 10 other persons and no money. The actions and decisions of the people on the island would be mainly based on their skills, possessions, and needs.

Consider the Concept of Bartering

Without a standardized currency, individuals may resort to bartering. Bartering is a system of exchange where goods or services are directly exchanged for other goods or services without a medium of exchange, like money.

Evaluate the Efficiency of the Barter System

While bartering might be the initial method of trade, it has its limitations. For example, the 'double coincidence of wants' problem: for a successful barter, both parties need to have what the other wants. This problem might lead to inefficiency as people spend more time trying to find suitable trading partners.

Recognize the Emergence of a Standardized Medium of Exchange

Given these limitations, it's plausible that, in order to increase trade efficiency, the individuals on the island would eventually agree upon some form of standardized medium of exchange. This could be anything: a certain type of seashell, specific food items, or even a completely new arbitrary object or idea. The critical point is that everyone would come to understand and accept this medium as a stand-in for value, thus acting as money.

Understand Possible Reasons Why Money Might Not Emerge

However, it's also possible that due to the small population size, people might prefer continuing with bartering or develop a sharing system or a form of communism where resources are shared equally. Money's emergence would likely depend on the specific needs and circumstances of the individuals on the island.