Question

In a 2x2 general equilibrium model of exchange with goods X and Y and two consumers 1 and 2, both of whom have a weakly positive endowment of X and Y. In the exchange equilibrium, we know that:

• A. The MRS_XY for consumer 1 is greater than the MRS_XY for consumer 2
• B. The MRS_XY for consumer 1 is less than the MRS_XY for consumer 2
• C. The MRS_XY for consumer 1 is equal to the MRS_XY for consumer 2
• D. The MRS_XY and MRS_XY are both zero

Hint:

What condition must hold in a general equilibrium?

Answer 1

The Correct Option is C

In a general equilibrium model, the marginal rate of substitution (MRS) between two goods must be equal for both consumers at equilibrium. This ensures that the marginal utility per unit of the good is equal for both consumers, which is a condition for exchange equilibrium. Hence, the correct answer is (c).