Asked by Kaila Martinez on Jul 08, 2024
Verified
Which of the following is true at the exchange equilibrium between two individuals?
A) Their marginal rates of substitution are equal.
B) The slopes of the individuals' indifference curves are equal.
C) Both individuals' marginal rates of substitution are equal to the ratio of the prices of the goods.
D) A and B only
E) A, B, and C are all true.
Exchange Equilibrium
A situation in a market where the quantity demanded by consumers is equal to the quantity supplied by producers, leading to a stable price.
Marginal Rates
Rates that apply to the next level of consumption, production, or income, often used in taxation to refer to the percentage of tax applied to the next dollar earned.
Indifference Curves
Graphical representations used in microeconomics to show different combinations of two goods that provide the same level of utility or satisfaction to an individual.
- Pinpoint and determine the marginal rates of substitution in the context of maximizing utility.
- Grasp the criteria and implications associated with attaining Pareto efficiency in resource allocation.
- Explicate the role of market prices in achieving competitive equilibrium and efficient allocation.
Verified Answer
PS
Patrícia SánchezJul 09, 2024
Final Answer :
E
Explanation :
At the exchange equilibrium, both individuals should be willing to trade at the same rate, which means their marginal rates of substitution should be equal (A). Moreover, the exchange equilibrium represents a point where the budget constraint is tangent to the slope of the indifference curve for each individual (B). At this point, the ratio of the prices of the two goods should be equal to the ratio of the marginal utilities of the two goods (C). Therefore, all three statements are true at the exchange equilibrium, so the best choice is E.
Learning Objectives
- Pinpoint and determine the marginal rates of substitution in the context of maximizing utility.
- Grasp the criteria and implications associated with attaining Pareto efficiency in resource allocation.
- Explicate the role of market prices in achieving competitive equilibrium and efficient allocation.