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#cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-3-utility-theory #study-session-4

Helen Smith and Tom Warren have identical baskets containing books (B) and compact discs (D). Smith’s MRSBD equals 0.8 (i.e., she is willing to give up 0.8 disc for 1 book), and Warren’s MRSBD equals 1.25.

  1. Determine whether Warren would accept the trade of 1 of Smith’s discs in exchange for 1 of his books.

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3. UTILITY THEORY: MODELING PREFERENCES AND TASTES
trade one good for the other that made trading beneficial to both. But if they trade to a pair of bundles at which their MRSs are equal, then trading will cease. EXAMPLE 3 Understanding Voluntary Exchange <span>Helen Smith and Tom Warren have identical baskets containing books (B) and compact discs (D). Smith’s MRS BD equals 0.8 (i.e., she is willing to give up 0.8 disc for 1 book), and Warren’s MRS BD equals 1.25. Determine whether Warren would accept the trade of 1 of Smith’s discs in exchange for 1 of his books. State and justify whether Smith or Warren has a relatively stronger preference for books. Determine whether Smith or Warren would end up with more discs


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