Hi, I would like to know how to do this question. Thanks Suppose that basketball (Raptors)...

Hi, I would like to know how to do this question. Thanks

Suppose that basketball (Raptors) tickets are $60 each and hockey (Maple Leafs) tickets are
$24 each. If you had basketball and hockey tickets such that you would initially trade 2
basketball tickets for each hockey ticket, which tickets would you trade and what would be
your equilibrium exchange of basketball for hockey tickets?
A) Trade hockey for basketball tickets until you reach 0.4 hockey per basketball tickets
B) Trade hockey for basketball tickets until you trade 2.5 hockey per basketball tickets
C) Trade basketball for hockey tickets until you reach 0.4 hockey per basketball tickets
D) Trade basketball for hockey tickets until you reach 2.5 hockey per basketball tickets
E) Trade basketball for hockey tickets until you reach 0.5 hockey per basketball tickets

Expert Solution

The absolute value of the marginal rate of substitution between hockey tickets and basketball tickets is 2 (basketball tickets for one hockey ticket). At the consumer optimum, absolute value of marginal rate of substitution, should be equal to the price ratio. Now the price ratio in this case is 24/60 = 0.4. the equilibrium exchange rate therefore should be 0.4 at the consumer optimum bundle. But the current marginal rate of substitution is greater than the optimal exchange rate. This shows that currently the consumer gets more utility from hockey tickets and less utility from basketball tickets

A move towards the consumer optimum would require the consumer to consume more hockey tickets, so that its marginal utility falls and less basketball tickets, so that its marginal utility rises. Therefore, consumer should trade more basketball tickets to get more hockey tickets. Option C is correct.

Rahul Sunny answered 1 year ago

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