Consider a Potential, Voluntary Exchange Between Two People

question 40

Essay

Consider a potential, voluntary exchange between two people. Assume that both people have complete information about each other's preferences and that there are no transaction costs. Consumers A and B have between them 9 units of X and 15 units of Y. Initially, A has 6 of X and 10 of Y, and B has 3 of X and 5 of Y. Consumer A's marginal rate of substitution of X for Y is 2 and B's marginal rate of substitution of X for Y is 1/3. Is there room for a mutually beneficial, voluntary exchange? Determine which consumer would trade for more X and which consumer would trade for more Y. If trade takes place, can you explain the terms of trade?

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Definitions:

Equilibrium Price

The price at which the quantity of a product demanded by consumers equals the quantity supplied by producers, leading to market balance.

Buyers

Entities or persons that buy products or services.

Sellers

Individuals or entities that offer goods or services for sale to consumers or other businesses in the market.

Expected

Refers to the anticipated outcome, value, or occurrence based on probability or prior evidence.