If transaction costs are reduced, a potential trade can turn into an actual trade.?

Question

a. true
b. false

Answer 1

a. CAN is the key word.

However, transaction costs should not be that large unless you're dealing with full service brokers.

If you've got a discount or internet broker, commissions/transaction costs should be minimal.

Answer 2

If transaction costs are reduced (i.e., if the cost of gasoline decreases and makes it cheaper to move cars from Detroit to L.A.), then a potential trade (i.e., a potential car sale in L.A.) can turn into an actual trade (i.e., an actual car sale in L.A.).

- True, so long as the buyer/ buying decision is sensitive to changes in the total price (let's say 5%) that could result from a decrease in the price of gasoline. Otherwise, the buyer may appreciate the fact that a fall in gas prices has made his Lincoln Continental 5% cheaper, but she/ he needs the total price to fall by more than 15% (or more) before they're ready to "trade" their money for the car at hand.