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 Smith or Warren would end up with more discs than he/she had to begin with, assuming they were allowed to exchange at the rate of 1 book for 1 disc. Justify your answer.
Answer
Smith would have more discs than she originally had. Because Smith has a relatively stronger preference for discs and Warren has a relatively stronger preference for books, Smith would trade books for discs and so would end up with more discs.
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 Smith or Warren would end up with more discs than he/she had to begin with, assuming they were allowed to exchange at the rate of 1 book for 1 disc. Justify your answer.
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 Smith or Warren would end up with more discs than he/she had to begin with, assuming they were allowed to exchange at the rate of 1 book for 1 disc. Justify your answer.
Answer
Smith would have more discs than she originally had. Because Smith has a relatively stronger preference for discs and Warren has a relatively stronger preference for books, Smith would trade books for discs and so would end up with more discs.
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Parent (intermediate) annotation
Open it 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.
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
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