MS09 - Economics 104B Solution for Midterm Exam Spring 2009...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

Page1 / 3

MS09 - Economics 104B Solution for Midterm Exam Spring 2009...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online