Consider a fiat money/barter system like that portrayed in this chapter. Suppose the number of goods J is 100. Each search for a trading partner costs an individual 2 units of utility.
a. What is the probability that a given random encounter between individuals of separate islands will result in a successful barter?
b. What are the average lifetime search costs for an individual who relies strictly on barter?
c. What are the average lifetime search costs for an individual who uses money to make exchanges?
Now let us consider exchange costs. Suppose it costs 4 units of utility to verify the quality of goods accepted in exchange and 1 unit of utility to verify that money accepted in exchange is not counterfeit.
d. What are the total exchange costs of someone utilizing barter?
e. What are the total exchange costs of someone utilizing money?