The trade described in the passage is best seen as an early example of which of the following?

• A. Comparative advantage
• B. Price discrimination
• C. Market failure
• D. Monopolistic competition

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of comparative advantage, which occurs when a party can produce a good or service at a lower opportunity cost than another, leading to mutually beneficial trade.
2. Step 2: Review the other options: price discrimination (charging different prices to different consumers), market failure (when markets do not allocate resources efficiently), and monopolistic competition (a market structure with many firms selling differentiated products).
3. Step 3: Analyze the trade described in the passage to determine if it involves parties specializing based on their lower opportunity costs, which is the hallmark of comparative advantage.
4. Step 4: Confirm that the trade benefits both parties by allowing them to consume more than they could without trade, indicating gains from specialization and exchange.
5. Step 5: Conclude that the trade exemplifies comparative advantage because it highlights how differences in opportunity costs drive beneficial trade, rather than the other concepts listed.