Answer to Question 1
Economic institutions define the environment in which people can trade. As an example,criminal law is one of many conditions that affects trade between people. The law limits peoples' opportunities, it threatens a person with punishment that may be severe enough to deter him/her from stealing goods belonging to someone else or offering to sell something illegal. The law also expands opportunities for trade. If the law makes people less likely to steal what a person produces, he/she can be more confident of earning a return on his/her investment in a facility to produce them.Institutions like laws can change with their environment. The significance of some important forms of economic institutions are discussed below:
a) Contracting: The delivery and payment obligations present in a contract along with numerous other clauses help to increase the economic value a transaction creates for the trading parties.
b) Market Protocols: Buyers and sellers often agree to use market protocols to propose and make transactions. Auctions are an institution where the protocols may determine a participant's best bidding strategy and the expected revenue of the seller. The different protocols in various types of auctions lead rational bidders to choose different strategies.
c) Etiquette: Whether two strangers can arrange a transaction that benefits them both can depend on whether they meet each other's expectations before the transaction.
Answer to Question 2
c
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