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

Helen Smith and Tom Warren have identical baskets containing books (B) and compact discs (D). Smith’s MRSBD equals 0.8 (i.e., she is willing to give up 0.8 disc for 1 book), and Warren’s MRSBD equals 1.25.

Determine whether Warren would accept the trade of 1 of Smith’s discs in exchange for 1 of his books.

Warren’s MRSBD equals 1.25, meaning that he is willing to give up 1.25 discs for 1 more book. Another way to say this is that Warren requires at least 1.25 discs to compensate him for giving up 1 book. Because Smith only offers one disc, Warren will not accept the offer. (Of course, Smith would not voluntarily give up one disc for one of Warren’s books. Her MRSBD is only 0.8, meaning that she would be willing to give up, at most, 0.8 disc for a book; so she would not have offered one disc for a book anyway.)

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

Helen Smith and Tom Warren have identical baskets containing books (B) and compact discs (D). Smith’s MRSBD equals 0.8 (i.e., she is willing to give up 0.8 disc for 1 book), and Warren’s MRSBD equals 1.25.

Determine whether Warren would accept the trade of 1 of Smith’s discs in exchange for 1 of his books.

?

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

Helen Smith and Tom Warren have identical baskets containing books (B) and compact discs (D). Smith’s MRSBD equals 0.8 (i.e., she is willing to give up 0.8 disc for 1 book), and Warren’s MRSBD equals 1.25.

Determine whether Warren would accept the trade of 1 of Smith’s discs in exchange for 1 of his books.

Warren’s MRSBD equals 1.25, meaning that he is willing to give up 1.25 discs for 1 more book. Another way to say this is that Warren requires at least 1.25 discs to compensate him for giving up 1 book. Because Smith only offers one disc, Warren will not accept the offer. (Of course, Smith would not voluntarily give up one disc for one of Warren’s books. Her MRSBD is only 0.8, meaning that she would be willing to give up, at most, 0.8 disc for a book; so she would not have offered one disc for a book anyway.)
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>Helen Smith and Tom Warren have identical baskets containing books (B) and compact discs (D). Smith’s MRS BD equals 0.8 (i.e., she is willing to give up 0.8 disc for 1 book), and Warren’s MRS BD equals 1.25. Determine whether Warren would accept the trade of 1 of Smith’s discs in exchange for 1 of his books.<body><html>

#### Original toplevel document

3. UTILITY THEORY: MODELING PREFERENCES AND TASTES
trade one good for the other that made trading beneficial to both. But if they trade to a pair of bundles at which their MRSs are equal, then trading will cease. EXAMPLE 3 Understanding Voluntary Exchange <span>Helen Smith and Tom Warren have identical baskets containing books (B) and compact discs (D). Smith’s MRS BD equals 0.8 (i.e., she is willing to give up 0.8 disc for 1 book), and Warren’s MRS BD equals 1.25. Determine whether Warren would accept the trade of 1 of Smith’s discs in exchange for 1 of his books. State and justify whether Smith or Warren has a relatively stronger preference for books. Determine whether Smith or Warren would end up with more discs

#### Summary

status measured difficulty not learned 37% [default] 0

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