Question

For the following question, assume Food is graphed on the vertical axis and Clothing is graphed on the horizontal axis. Suppose Ann’s marginal rate of substitution between Food and Clothing is -3. Also, Bill’s marginal rate of substitution between Food and Clothing is -4. Propose a trade between Ann and Bill that would make them both better off.

Answer 1

Marginal rate of substitution of Ann=-3, it tells that ann as willing to substitue 3 units of food to get one more unit of cloth or she value one unit of clothes equal to 3 units of food.she values food more compare to bill.

Marginal rate of substitution of bill=-3, it tells that bill as willing to substitue 4 units of food to get one more unit of cloth or he value one unit of clothes equal to 4 units of food.he values clothes more compare to ann.

So any trade between 1 clothes for 3 food and 1 clothes for 4 food is benefit both.

For example trade 1 clothes for 3.5 food will benefit both.ann will give bill one unit of clothes and get 3.5 units of food.so she got 0.5 additional unit of food than she was willing to accept for one unit of clothes.

Same bill have additional 0.5 unit of food than he was willing to give.

So both get benefited.