True or false: If two consumers both view X and Y as perfect substitutes and both...

True or false: If two consumers both view X and Y as perfect substitutes and both consumers like an additional unit of X better than an additional unit of Y, then it is impossible for them to make a Pareto-improving trade away from their initial endowment. Explain.

Expert Solution

The given statement is True

The reason is that an additional unit of X would make both of them better off. So, the one who gives up that additional unit becomes worse off. Pareto improving trade is the one in which exchange happens such that nobody is worse off but someone becomes better off. This situtaion cannot be improved further because benefitting one of the consumers would lead to a loss for the other.

Rahul Sunny answered 2 years ago

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