Consider an economy with two consumers, A and B, where the marginal rate of substitution of good X for good Y is: MRSXY of A = 4 MRSXY of B = 2 Assuming no transaction costs, which of the following trades will make BOTH consumers better off?

MRSXY of A = 4 means Consumer A is willing to give up 4 units of Y to obtain 1 additional unit of X. MRSXY of B = 2 means Consumer B is willing to give up only 2 units of Y to obtain 1 additional unit of X. Since: MRSXY of A > MRSXY of B Consumer A values X relatively more highly than Consumer B. Therefore, gains from trade are possible if Consumer B gives X to Consumer A and receives Y in return. For example, suppose the exchange takes place at a rate of 1 unit of X for 3 units of Y. Consumer A is willing to pay up to 4 units of Y for 1 unit of X, so paying only 3 units makes A better off. Consumer B values 1 unit of X at only 2 units of Y, so receiving 3 units of Y in exchange for 1 unit of X makes B better off. Thus, Consumer A gives Y to Consumer B in exchange for X, making both consumers better off.