In a voluntary exchange between two individuals, which of the following statements is true?

• A. Resources are allocated based solely on tradition.
• B. The government sets the terms of the exchange.
• C. Only one party benefits while the other loses.
• D. Both parties expect to be better off after the exchange.

Answer: (D)

Verified step by step guidance

1. Understand the concept of voluntary exchange: it occurs when two individuals agree to trade goods or services because each expects to gain from the transaction.
2. Recognize that in voluntary exchange, both parties anticipate an improvement in their well-being or utility, which is why they willingly participate.
3. Eliminate incorrect options by analyzing their implications: resource allocation based solely on tradition ignores individual preferences; government setting terms contradicts voluntary nature; one party losing contradicts mutual benefit.
4. Recall that voluntary exchange is a fundamental principle in microeconomics illustrating how markets allocate resources efficiently through mutual gains.
5. Conclude that the true statement is that both parties expect to be better off after the exchange, reflecting the mutual benefit and incentive to trade.