Figure 16.2.2
-Which of the following is true at the exchange equilibrium between two individuals?
A) Their marginal rates of substitution are equal.
B) The slopes of the individuals' indifference curves are equal.
C) Both individuals' marginal rates of substitution are equal to the ratio of the prices of the goods.
D) A and B only
E) A, B, and C are all true.

Question

Figure 16.2.2
-Which of the following is true at the exchange equilibrium between two individuals?
A) Their marginal rates of substitution are equal. 
B) The slopes of the individuals' indifference curves are equal. 
C) Both individuals' marginal rates of substitution are equal to the ratio of the prices of the goods. 
D) A and B only 
E) A, B, and C are all true.

Quizplus · Accepted Answer

At the exchange equilibrium, both individuals should be willing to trade at the same rate, which means their marginal rates of substitution should be equal (A). Moreover, the exchange equilibrium represents a point where the budget constraint is tangent to the slope of the indifference curve for each individual (B). At this point, the ratio of the prices of the two goods should be equal to the ratio of the marginal utilities of the two goods (C). Therefore, all three statements are true at the exchange equilibrium, so the best choice is E.

Figure 16.2.2 -Which of the Following Is True at the Exchange Equilibrium