In: Economics
You asked your friends, John and Jim to tell you how much EXTRA satisfaction they get by drinking wine and beer. Their answers are in the table below for the first four glasses of wine and beer respectively.
John – MUbeer |
John - MUwine |
Jim-MUbeer |
Jim-MUwine |
|
1 |
20 |
30 |
15 |
7 |
2 |
18 |
25 |
14 |
5 |
3 |
15 |
20 |
13 |
3 |
4 |
10 |
15 |
11 |
1 |
Currently John has 2 glasses of beer and 2 glasses of wine in front of him. Jim has 1 glass of beer and 2 glasses of wine in front of him.
a. Will John be better off if he trades 1 glass of beer with Jim for a glass of wine? Will the trade be made?
b. Suppose John asks for the 2 glasses of wine that Jim has, and offers him a glass of beer instead. Will the trade be made?
a) John already has 2 glasses of beer and 2 glasses of wine. If he decides to give 1 glass of beer in exchange of 1 glass of wine, we can see that the decrease in utility due to giving up 1 glass of beer is 18 and the increase in utility due to an extra glass of wine is 20. So the overall increase in utility will be 2. So we can say that John will be better off from this trade. As for Jim, an increase in glass of beer increases his utility by 14 and an decrease in glass of wine, decreases his utility by 5. So there is an overall increase in utility by 9 for Jim. As both will be benefitted from this trade, the trade will be made.
b) The total utility that Jim obtained from 2 glasses of wine was (7+5) = 12 and the utility that Jim would have from a glass of beer that John would give him will be equal to the marginal utility from the second glass of beer which is 14. As there is an increase in overall utility by (14-12)= 2. This trade will be made.