Question

Assuming that Adam’s MRS is 4/2 and Brie’s MRS is 1/2, explain the relative differences in how much the consumers value the good using the concepts of Willingness to Pay and Willingness to Accept. Finally, using the concepts of consumer and producer surplus, explain the benefits of exchange between the two consumers if they agree to trade at a rate of 1Y for 1X.

Answer 1

Adam MRS is 4/2 means Adom prefer to consume good X at high rate by keeping the utility constant or we may say good X's value is high for Adam that's why Adom will exchange 2 units of X with 4 units of Y.

Brie MRS is 1/2 means Brie prefer to consume good Y at high rate by keeping the utility constant or we may say good Y's value is high for brie that's why Brie will exchange 1 units of Y with 2 units of X.

(Note that MRS provides the same utility at all points of Indiference Curve)

If two consumer exchane 1Y for 1X that means both the consumers are neutral in terms of consuming good X & good Y, the benefit is that they can consume both the goods with same utility and preference also both goods will make them same level of better off.