Question from Past Microeconomics Qualifying ExamEdit
Spring 2006 - Section I, Question six, George Mason University
T, F, U. State first whether the following statements are true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.
We normally observe specialization in production but diversification in consumption but that would be impossible without trade opportunities.
True. Specialization in production is impossible if there are no trade opportunities, because people wouldn't be able to sustain themselves. Diversification in consumption is possible to a certain degree without trade, but limited by a persons ability to produce, i.e. if I produce different things I can consume the same diversity of things but without trade I'm still limited to the diversity that I can produce without anyone's help.
Correct me if I am wrong. Convexity of indifference curves is due to diversity of consumption. You do not need trade for diversity, just convex IDC.
-- You don't need trade to desire diversity in consumption, but -- if you have specialization in production -- you need trade to actually consume a diversity of goods.