Suppose I own 3 bananas and 6 apples, and you own 5 bananas and 10 apples. Assume we both have well-behaved indifference curves.

With bananas and apples on the horizontal and vertical axes, respectively, the slope of my indifference curve at my current bundle is –2, and the slope of your indifference curve through your current bundle is –1.

Is there a possible trade we could make that would make us both better off? If so, describe how such a trade can make us both better off. (Assume that apples and bananas are divisible such that we can trade fractional amounts, as in 1.5 bananas or 0.5 apples.)

Hint: What does the marginal rate of substitution represent?

B)

Suppose trade was possible to make us both better off. After such trade has taken place, will our marginal rates of substitution have gone up or down in absolute value? Describe in detail what would happen to our respective MRS.

Hint: Given well-behaved indifference curves, how does the marginal rate of substitution behave as we move along an indifference curve from left to right?

C)

If the values for our MRSs at our current consumption bundles (3, 6) and (5, 10), where (x, y) corresponds to (bananas, apples), were reversed, how would your answers to the previous two questions change?

D)

What would have to be true about our MRSs at our current bundles of (3, 6) and (5, 10), where (x, y) corresponds to (bananas, apples), to rule out the possibility of a mutually beneficial trade?

Answer rating: 100% (QA)

A Yes there is a possible trade we could make that would make us both better off If we trade 2 bananas for 4 apples we can both increase our utility T... View the full answer