Answer to Question #219023 in Economics of Enterprise for Meredith Bruno

Question

Helen and Tom have identical baskets containing books (B) and compact discs (D). Helen’s MRS_BD = 1.5 and Tom’s MRS_BD = 0.5.

 

12. What does Helen’s MRS_BD=1.5 mean?

13. Would Helen accept the trade of 2 of Tom’s discs in exchange for 1 of her books?

14. Between Helen and Tom, who has a relatively stronger preference for discs. Explain.

15. Determine whether Helen or Tom would end up with more books than he/she had to begin with, assuming they were allowed to exchange at the rate of 1 book for 1 disc.

Answer 1

12. Helen's $MRS_BD= 1.5$ Means that she is willing to have 1.5 of the amount of one item, book or disc in relation to the other item, which is a book or disc as long as the new item is equally satisfying.

13.Helen would accept the trade of 2 of Tom's disc for 1 of her books because the marginal rate of substitution for both of them will be satisfied.

14. Helen has a stronger preference for discs because she has a higher rate of substitution of books to discs .

15. When allowed to exchange at the rate of 1 book to one disc, Tom will end up with more books than he had to begin with.