Question

Jane has 3 liters of soft drinks and 9 sandwiches. Bob, on the other hand, has 8 liters of soft drinks and 4 sandwiches. With these endowments, Jane's marginal rate of substitution (MRS) of soft drinks for sandwiches is 4 and Bob's MRS is equal to 2 . Draw an Edgeworth box diagram to show whether this allocation of resources is efficient. If it is, explain why. If it is not, what exchanges will make both parties better off?

Answer 1

The allocation between Jane and Bob is inefficient as their MRS values are not equal. An Edgeworth box diagram would show room for mutually beneficial trade. Efficiency is achieved when both parties equalize their MRS to 2 through trade.

Step-by-step explanation:

The question involves the concept of marginal rate of substitution (MRS) and the efficiency of resource allocation between two individuals, Jane and Bob. An Edgeworth box diagram can be used to illustrate if the allocation is efficient.

The MRS represents the rate at which an individual is willing to give up one good in exchange for another while maintaining the same level of utility. In this case, Jane has an MRS of 4, meaning she's willing to give up 4 liters of soft drinks for one sandwich. Bob has an MRS of 2, indicating he will give up 2 liters of soft drinks for one sandwich.

For an efficient allocation of resources, the MRS between the two parties should be equal. Since Jane’s MRS is 4 and Bob’s MRS is 2, the allocation is not efficient. They can trade until their MRSs equalize. Jane could give some of her sandwiches to Bob in exchange for some of his soft drinks. This exchange will continue until Jane’s MRS decreases to 2 and Bob’s MRS increases to 2, signifying an equitable tradeoff.