Assume that two individuals, A and B, are willing to trade products X and Y. Before a possible trade, A has the following marginal rates of substitution of X for Y (or of Y for X): MRSXYA = 0.80 (or equivalently, MRSYXA = 1.25)
Also, before a possible trade, B has these marginal rates of substitution of X for Y (or of Y for X): MRSXYB = 1.50 (or equivalently, MRSYXB = 0.67). Determine if trade can take place that would benefit either or both. If trade can benefit either or both, determine who will trade for what.
Trade is possible if the MRSXYA does not equal MRSXYB. In this problem, they are unequal; A is willing to give up up to 1.25 units of X to get one additional unit of Y, while B is willing to give up up to 1.5 units of Y to get one additional unit of X. Therefore A will trade X for Y while B trades Y for X. The exact terms of trade will be between 0.8 and 1.5 units of X for Y and will depend on the exact bargaining process.
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