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An allocation of goods in an economy of two agents (Alice and Bob) is Pareto efficient....

An allocation of goods in an economy of two agents (Alice and Bob) is Pareto efficient. Among the goods in the economy are apples and bananas. Both Alice and Bob consume (positive amounts of) apples and bananas. T/F/U: If the MRS of apples to bananas for Alice is 5, then the MRS of apples to bananas for Bob is 1/5.

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Answer #1

Solution:

If the allocation of goods between the two agents would be Pareto efficient, it means that at the optimal and efficient point, marginal rate of substitution of both the agents and the price ratio are all equal.

Denoting apples by A and bananas by B, it must be:

So, MRSA,B for Alice = MRSA,B for Bob = PA/PB (where PA is the price of an apple, and PB is the price of a banana)

The given statement that MRSA,B for Alice = 5 is not equal to 1/5 = MRSA,B for Bob. So, the given statement is False.

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