Answer to Question #221247 in Macroeconomics for Joe

Question

Assuming there are two consumers in the Ghanaian economy characterised by Consumer A and consumer B and there are two main commodities in this economy characterised by commodity X and Y. Per the discussion in class, general equilibrium of production and exchange will occurs when..
(a) (MRSxy)A = (MRSxy)B
(b) MRTSxy = Px/Py
(c) MRSxy for A and B = Px/Py
(d) MRTSxy = (MRSxy)A = (MRSxy)B= Px/Py.

Explain your answer

Answer 1

Solution:

The correct answer is (d) MRTSxy = (MRSxy)A = (MRSxy)B= Px/Py.

The general equilibrium in exchange occurs when both consumers have the same MRS, which is the tangent point on the indifference curve, which means efficiency. For a general equilibrium between exchange and production to be achieved, the MRS for both consumers, that is (MRSx)A and (MRSy)B must be equal to MRTSxy.

General equilibrium of production and exchange: MRTSxy = (MRSxy)A = (MRSxy)B= Px/Py.