Suppose Jen and Mike have initial distributions of movie theater passes and gallons of gas such that Jen's marginal utility of movie passes and gasoline are both 5,while Mike's marginal utility of movie passes and gasoline are 8 and 1 respectively.If movie theater passes are $9 each and gasoline is $3 per gallon,which of the following should occur?
A)Jen should trade gasoline for movie passes until her marginal utilities for both are 3 and 1 respectively.
B)Mike should trade movie passes for gallons of gasoline until his marginal utilities for each is 2 and 3 respectively.
C)Mike should trade gasoline to Jen for movie passes until the marginal utilities of both goods are the same between the two of them,and their marginal rates of substitution of movie passes for gasoline are both equal to 3.
D)Mike should trade gasoline to Jen for movie passes until the marginal utility of gasoline for each is three times the marginal utility of movie passes for each.

Question

Quizplus · Accepted Answer

Mike's marginal utility for gasoline is lower than Jen's, and his marginal utility for movie passes is higher. This means that Mike values movie passes more than gasoline, while Jen values gasoline more than movie passes. Therefore, they can both benefit from trading with each other. To find the best trade, they should trade until their marginal utilities for each good are equal, and their marginal rates of substitution (MRS) are the same. From the information given, we know that Mike's MRS for movie passes to gasoline is 3 (8/3), and Jen's MRS for movie passes to gasoline is 1/3 (5/15). Therefore, they should trade until Mike's marginal utility for gasoline is 5 (3*5/15) and Jen's marginal utility for movie passes is also 5. This will maximize their total utility and benefit both of them. Choice A and B do not take into account the different marginal utilities of each person and are therefore not optimal. Choice D does not consider the principle of equalizing marginal utilities, and is therefore not the best choice.

Suppose Jen and Mike Have Initial Distributions of Movie Theater