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#cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-3-utility-theory #study-session-4
We could say that Warren is better off by the value to him of one ounce of wine because he was willing to give up two ounces but only had to give up one ounce for his slice of bread. What about Smith? She is better off by the value to her of one slice of bread because she was willing to give up two slices of bread for her one additional ounce of wine but only had to give up one slice. Both Smith and Warren are better off after they trade. There is no more bread or wine than when they began, but there is greater wealth because both are better off than before they traded with each other. Both Smith and Warren ended on higher indifference curves than when they began.
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3. UTILITY THEORY: MODELING PREFERENCES AND TASTES
e ounce of wine. If they actually made such a trade at the one-to-one ratio, then Smith would end up with more wine and less bread than she started with, and Warren would end up with more bread and less wine than he started with. <span>We could say that Warren is better off by the value to him of one ounce of wine because he was willing to give up two ounces but only had to give up one ounce for his slice of bread. What about Smith? She is better off by the value to her of one slice of bread because she was willing to give up two slices of bread for her one additional ounce of wine but only had to give up one slice. Both Smith and Warren are better off after they trade. There is no more bread or wine than when they began, but there is greater wealth because both are better off than before they traded with each other. Both Smith and Warren ended on higher indifference curves than when they began. As Smith gives up slices of bread for more ounces of wine, her MRS BW increases; her indifference curve becomes steeper. Simultaneously, as Warren gives up ounces of wine


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