Question

Assume the first agent is endowed with 2 apples and 3 bananas. If the relative price of apples in terms of bananas P_a / P_b to be equal to 1, the consumption bundle will be (2A, 3B) in absence of trade. What does the consumption bundle in absence of trade look like if the relative price of apples in terms of bananas P_a / P_{b is 0.5?}

_{Please also draw the budget constraint line and point out the orginal endowment and slop?}

Answer 1

You can see that with prices being unitary on the slope, the utility the consumer derives from the bundle is equal. That is the same amount of satisfaction is recieved if he consumes 2 apples or 3bananas. On the other hand, when we have the slope as 0.5, the consumption basket without trade might look like (1A, 6B) This is because in relation to apples, the prices have gone down for bananas, hence this would result in consuming more bananas than apples.

Here is the initial budget line expression.