Robinson and Friday trade bananas (B) and apples (A).

Robinson and Friday trade bananas (B) and apples (A). At their initial allocation of B and A, Robinson’s MRS is 3B/2A and Friday’s MRS is 1B/4A. Is this an efficient allocation? If so, explain clearly why? If not, explain why not and show a trade that is efficiency improving.

Expert Solution

We know that at efficient allocation the MRS of both the persons should be equal.

From the question we have

==>MRS of Robinson =3B/2A = 1.5B/A

==> MRS of Friday = 1B/4A = 0.25B/A

From the above we can see that MRS of Robinson and Friday are not equal. Hence the allocation is not efficient.

For an efficiency improving trade Robinson should offer A to Friday, in exchange of more B.

It will result in change in MRS values of Robinson and Friday and make them equal and hence achieve efficiency.

Rahul Sunny answered 2 years ago

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