Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 4] CONSUMER DEMAND THEORY 85
4.25 Explain what happens if, starting from point C in Fig. 4-22, (a) individual A exchanges 3Y for 6X with
individual B, (b) individual B exchanges 2X for 7Y with individual A, and (c) individual A exchanges
5Y for 4X with individual B.
Fig. 4-22
(a) If A gives up 3Y in exchange for 6X from B, A would move from point C on indifference curve I to
point S on indifference curve III, while B would move along indifference curve I 0 from C to S. A
would gain all of the benefit from the exchange while B would gain and lose nothing (since B
would still be on indifference curve I 0 ). At point S, indifference curves III and I 0 are tangent and so
their slopes are equal. This means that at point S, the MRS xy for A equals the MRS xy for B and so
there is no basis for further exchange. (From point S, the amount of Y that A would be willing to
give up to obtain one unit of X from B is not sufficient to induce B to part with one unit of X.)
(b) IfB gave up 2X in exchange for 7Y from A, individual B would move from point C on indifference curve
I 0 to point F on indifference curve III 0 . In this case, all of the gains from this exchange would accrue to
B. A would gain and lose nothing from this exchange since A would still be on indifference curve I. At
point F, the MRS xy for A equals the MRS xy for B and so there is no further basis for exchange.
(c) Starting from point C on indifference curves I and I 0 , if individual A exchanges 5Y for 4X with individual
B (and gets to point E), both A and B gain from the exchange since point E is on indifference curves II and
II 0 . Joining points of tangency for the indifference curves of individual A and individual B we get contract
curve FS (see Fig. 4-22). When A and B are not on the contract curve, either A or B or both can gain from
exchange. When A and B are on the contract curve, no further gains from exchange are possible.
4.26 Suppose that the tastes of individual A are represented by indifference curves I, II, and III of Problem
4.10, while the tastes of individual B are given by the indifference curves of Table 4.13.