Scenario 16.1:
Irrespective of the amount of cheese doodles and pretzels that Sam consumes, his marginal rate of substitution of cheese doodles for pretzels is 2. Also, irrespective of the amount of cheese doodles and pretzels that Sally consumes, her marginal rate of substitution of cheese doodles for pretzels is 3.
-Refer to Scenario 16.1. Initially Sam and Sally are allocated 10 cheese doodles and 10 pretzels each. Which of the following statements are TRUE?
A) The initial allocation is Pareto optimal as it is equitable.
B) The initial allocation is Pareto optimal as Sally and Sam have equal amounts of both goods.
C) The allocation is not Pareto optimal. An allocation that gave Sam all of the cheese doodles and Sally all of the pretzels would make both of them better off.
D) The allocation is not Pareto optimal. An allocation that gave Sam four of the cheese doodles and sixteen of the pretzels (leaving Sally the rest) would make both of them better off.

Question

Quizplus · Accepted Answer

DThe initial allocation is not Pareto optimal because the marginal rates of substitution (MRS) for Sam and Sally are different, indicating that there is an opportunity for trade that could make at least one person better off without making the other worse off. In option C, giving Sam all the cheese doodles and Sally all the pretzels would better align with their preferences, as indicated by their MRS values. Similarly, option D suggests a specific reallocation that would also better satisfy their preferences based on their MRS values, making both better off.

Scenario 16.1: Irrespective of the Amount of Cheese Doodles and Pretzels That