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nakungth nakungth
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A year ago
Two individuals, A and B, are free to engage in trade of clothing and food. Initially, A has 12 units of clothing and 9 units of food, and B has 8 units of clothing and 11 units of food. The individuals have the following utility functions in clothing C and food F:
   UA = 0.15QC ∙ QF
   UB = 0.08QC ∙ QF       
where QF represents units of food, QC represents units of clothing, and U represents utility. Determine if a mutually beneficial trade is possible between A and B. If so, who would trade for what?
Textbook 

Microeconomics


Edition: 8th
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boransalboransal
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A year ago
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If, and only if, an efficient allocation exists, the MRSA of clothing for food for A will equal the MRSB of clothing for B.

     =   =   =   =   =   = 0.75
     =   =   = 1.375

In this situation the MRS for A does not equal MRS for B; consequently there is a potential for mutually beneficial trade.  Individual A is willing to give up at most 0.75 units of food to get one additional unit of clothing.  Individual B is willing to give up at most 1.375 units of food to get one unit of clothing (or give up 0.727 units of clothing to get one unit of food).   Therefore a mutually beneficial exchange can be made.  A would trade clothing for food and B would trade food for clothing.  The terms of trade would be between 0.75 and 1.375 depending upon the exact bargaining process.
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