Here we think about two people, Sally & Tamara, who are in a ridiculously simple place...

Here we think about two people, Sally & Tamara, who are in a ridiculously simple place where only two goods exist, apples & Hot Dogs. Sally is indifferent between bundles A, B, C, D, E, F, and G. Tamara is indifferent between bundles H, J, I, K, L, M, and N.

Sally:

Bundle	apples	hotdogs
A	0	29
B	1	22
C	2	16
D	3	11
E	4	7
F	5	4
G	6	2

Tamara

Bundle	Apples	Hot Dogs
H	3	40
J	4	33
I	5	27
K	6	22
L	7	18
M	8	15
N	9	13

What is the value of 4 apples to Sally? (1)
What is the marginal value of the 4th apple to Sally? (1)
What is the marginal value of the 4th apple to Tamara? (1)
Let us say, Sally has bundle E & Tamara has bundle H. Explain how trade can make each one of them better off (give all relevant details, such as who would trade what for what, what will each person ends up with as the result of their trade, and how you know that what they have after trade is better than what they have started with). (3)
What would be the equilibrium outcome of their trade (i.e., how many apples and how many hot dogs would each of them have in equilibrium)? Explain, with reference to maximization, how you know that that outcome is equilibrium. (3)

Expert Solution

A) value of 4 apples to sally is simply the sacrifice of hotdogs to get 4 apples.from (a,h)=(0,29), to (4,7) ,she sacrifice 22(29-7) hotdogs ,so 4 apple values 22 hotdogs.

B)the marginal value of 4th apple is sacrifice of hotdogs to obtain additional unit of apple when sally has initially 3 apples.

From (3,11) to (4,7) ,sally sacrifice 4 hotdogs to get one additional unit or 4th unit of apples ,so Marginal value of 4th unit of apples to sally is 4 hotdogs.

C)from (3,40) to (4,33),tamara sacrifice 7 hotdogs to get one additional unit or 4th unit of apple,so Marginal value of 4th unit of apple to tamara is 7 hotdogs.

D)if sally is at point E,sally is ready to give up a unit of apple if she can get at least 4 units of hotdogs in exchange for one apple.

If Tamara is at Point H, Tamara is ready to get one additional unit of apple on cost of at max 7 hotdogs.

So 1 apples = 6, and trade happen between them, sally will sell 1 apple to get 6 unit of hotdogs and her endowment will be =(3,13), so with same number of apple as D ,she has more hotdogs ,so she is better off.

Tamara will get endowment =(4,34),so with number of apple as I, Tamara has more numbers of hotdogs,so she is also better off.

E)

Rahul Sunny answered 4 months ago

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