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Question: a) John has 40 gallons of gasoline (G) and 20 bags of sugar (S). For that market basket, John's MRSSG is 3G/1S. Maria has 40G and 50S. For that market basket, Maria's MRSSG is 1G/1S. Use a numerical example to explain how a trade can benefit both of them. Illustrate the trade by using an Edgeworth box diagram, showing that both consumers can reach higher indifference curves.

b) Suppose now that with 40G and 20S, John's MRSSG = 5G/1S. Suppose also that with 40G and 50S, Maria's MRSSG = 1G/1S. If John exchanges nine of his gallons of gasoline for three of Maria's bags of sugar, both of their MRSSG after exchange are 3G/1S. Are they both better off? Illustrate using an Edgeworth box diagram.

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M93118178

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