Question One (1)

Michael and Daniella have identical baskets containing Pens (P) and Books (B). Michael's MRSPB equals 1.62 (i.e., he is willing to give up 1.62 books for one pen), and Daniella's MRSPB equals 0.75.

1. Determine whether Daniella would accept the trade of one of Michael's books in exchange for one of her pens.

2. State and justify whether Michael or Daniella has a stronger preference for pens.

3. Determine whether Michael or Daniella would end up with more books than he or she had to begin with, assuming they were allowed to exchange at the rate of one pen for one book. Justify your answer.

Question Two (2)

Michael buys both Peanut Butter (P) and Jelly (J) each week. His MRSJP, or marginal rate of substitution of Jelly (J) for Peanut Butter (P), equals 0.85. The price of jelly is $2 per unit, and the price of peanut butter is $1.5 per unit.

1. Determine whether Michael is currently optimizing his budget over these two products. Justify your answer.

2. Explain whether the Michael should buy more peanut butter (P) or more jelly (J), if he is not currently optimizing his budget.