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Unformatted text preview: Economics 104B Solution for Midterm Exam Spring 2009 1. The MRS of A at his endowed bundle A = (40 , 20) is 5 (i.e., 1 unit of good 1 is worth 5 units of good 2 to him). The MRS of B at her endowed bundle B = (40 , 50) is 2 (i.e., 1 unit of good 1 is worth 2 units of good 2 to her). If A trades 6 units of good 2 for 2 units of good 1 with B, both their MRSs of good 1 for good 2 after trade become 2.5. a (4pt) Using an Edgeworth box diagram to show that both A and B would be willing to carry out the trade. Find the resulting allocation. Answer: The new allocation has bundle x * A = (42 , 14) for A and x * B = (38 , 52) for B. A gives up 6 units of good 2 in exchange for 2 units of good 1 which is less than the number of units of good 2 (10 units of good 2 to be precise) that A is willing to give up for the exchange. For this reason, A is better off. On the hand, B gives up 2 units of good 1 in exchange for 6 units of good 2 which is less than the number of units of good 1 (3 units of good 1 to be precise) that B...
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- Fall '09