Extending Trade outside the Camp. Late in World War II, a German guard exchanged bread and chocolate at the rate of one loaf for one chocolate bar. Inside the Allied POW camp, the price of chocolate was 15 cigarettes per bar, and the price of bread was 40cigarettes per loaf.
a. Is there an opportunity for beneficial exchange?
b. With the guard, a POW could exchange three chocolate bars for loaves of bread. In the camp, the POW could exchange the extra loaves for cigarettes, and then exchange the extra cigarettes for chocolate bars. In other words, the POW's net gain from trade is chocolate bars.