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#cfa #cfa-level-1 #economics #has-images #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-3-utility-theory #study-session-4

Suppose that the slope of Warren’s indifference curve at point a is equal to −2, and the slope of Smith’s indifference curve at point a is equal to – 1/2 . Warren is willing to give up 2 ounces of wine for 1 slice of bread, and Smith is willing to give up only 1/2 ounce of wine for 1 slice of bread. But that means she would be willing to give up 2 slices of bread for 1 ounce of wine. What would happen if Warren and Smith are allowed to exchange bread for wine? Suppose they are allowed to exchange at the ratio of one ounce of wine for one slice of bread. Would they both agree to an exchange at that ratio? Yes. Warren would be willing to give up two ounces of wine for a slice of bread, so he would certainly be willing to give up only one ounce of wine for one slice of bread. Correspondingly, Smith would be willing to give up two slices of bread for one ounce of wine, so she would certainly be willing to give up only one slice of bread for one 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.
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