Question
In a simple exchange economy, Ann's initial allocation is 6 Food (F) and 2 clothing (C) units. Bill's initial allocation is 1 F and 8
In a simple exchange economy, Ann's initial allocation is 6 Food (F) and 2 clothing (C) units. Bill's initial allocation is 1 F and 8 C units. At the initial allocation, Ann will give up 5 C for 1 F (MRS for Ann is 5, with F on the horizontal axis and C on the vertical axis) while Bill is willing to give up 2 C for 1F (MRS for Bill is 2).
QUESTION:
If they are to trade F and C with each other, who would be selling / buying what to ensure such a trade would be Pareto superior (i.e. one of them can be made better off without making the other worse off)? Explain your answer
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