Microeconomics Theory and

Applications 12th Edition Browning

Solutions Manual
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Browning & Zupan / Microeconomics: Theory & Applications, 12e Solutions Manual

Chapter 6 Exchange, Efficiency, and Prices

Solutions

6.1 The horizontal and vertical dimensions of an Edgeworth exchange box measure the total
quantities of the two goods. By taking the lower left corner as the origin for one of the
consumers (A), and the upper right corner as the origin for the other consumer (B), any point in
the box represents a division of the total quantity of each good between the two consumers. A
point on the side of the box indicates that one consumer has all the units of one of the goods. If
the endowment point is at the lower left corner, then consumer A has none of either goods while
consumer B has the total quantities of both goods. The opposite holds for the upper right corner.
The upper left corner indicates that consumer A has all of the units of the good measured by the
vertical axis (Y) and none of the units of the good measured by the horizontal axis (X), while B
has all of X and no units of Y. If the endowment is at the lower right corner, A has all of X and
no Y and B has no X and all of Y.

6.2 Vertical and horizontal movements indicate that one party has given some of one commodity
to the other party without getting anything in return. If both goods are economic goods, a
voluntary trade would not be shown by such movements.

6.3 Answer in text.

6.4 An efficient distribution of the two goods between two consumers is one for which it is
impossible to make one of the consumers better off without making the other consumer worse
off through any change in the distribution. An inefficient distribution is one for which it is
possible to change the distribution and make at least one of the consumers better off without
making the other worse off. Any point inside the Edgeworth box diagram lies on an indifference
curve for each consumer. The slope of the consumer’s indifference curve at the endowment point
measures his or her marginal rate of substitution for one good in terms of the other. If these
slopes differ, that is, the marginal rates of substitution for the two consumers differ, then it is
possible for one (or both) consumer to be made better off without harming the other. Mutually
beneficial trade is possible. If the MRSs are the same, that is, the indifference curves are tangent,
then the only way to make one consumer better off is to make the other worse off. Such a
distribution is efficient.

6.5 Answer in text.

6.6 Yes. Each moves to a higher indifference curve as seen in the figure below.

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Browning & Zupan / Microeconomics: Theory & Applications, 12e Solutions Manual

6.7 Answer in text.

6.8. No, their MRSs are not equal. The distribution does not lie on the contract curve. In the
figure below, point B is Bill’s optimal point and H is Hillary’s optimal point. Note that this
situation is due to the fact that many other people are in the market and the prices have been
determined by the market. Further, the idea of endowment here is less precise since the total
amount of hamburgers consumed by the two exceeds the dimensions of the box and the amount
of health care consumed is less than the dimensions of the box.

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Browning & Zupan / Microeconomics: Theory & Applications, 12e Solutions Manual

6.9 Answer in text.

6.10 Yes. If you borrow on a voluntary basis you must believe you are better off by borrowing at
the high interest rate than in not borrowing the money at all.

6.11 Answer in text.

6.12 Private markets operate by each agent operating in his or her own self-interest. Consumers
will maximize their utility by equating the marginal rate of substitution for two goods with the
ratio of the prices of the goods. If all consumers face the same prices, all consumers will have
identical marginal rates of substitution, which implies that the goods have been distributed in an
efficient way. This does not imply that some other distribution might not be better, but it would
have to rely on some basis other than efficiency.

6.13 The buyers who receive up to two Super Bowl tickets have different MRSs between tickets
and dollar outlays on all other goods. Thus, inefficiency in distribution results. The NFL's
prohibition on ticket scalping can be justified on equity but not efficiency grounds. By
preventing trade in allocated Super Bowl tickets, the NFL prohibition prevents the fixed number
of tickets from ending up in the hands of consumers who value the tickets the most.

6.14 Ticket scalping at college athletic events occurs when the allocation mechanism employed
to distribute tickets to an event results in individuals who are not initially allocated the tickets
valuing those tickets more than the individuals who are allocated the tickets. Scalping does not
occur at college athletic events where means to obtain tickets other than scalping exist (e.g. the
sale of tickets at or above the market clearing price) sufficient to ensure that a set number of
tickets end up in the most valuable hands and that every ticket that is valued above cost by a
consumer is distributed. From an economic perspective, ticket scalping should not be prohibited
since it serves to promote efficiency in the distribution of tickets.

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Browning & Zupan / Microeconomics: Theory & Applications, 12e Solutions Manual

6.15 Answer in the text.

6.16 There are two costs associated with such an approach: 1) The cost of relays imposed on all
aircraft on account of the price of a runway being set below market-clearing levels; and 2) an
inefficiency in distribution cost because the users of runway capacity do not necessarily end up
being those aircraft that end up valuing the capacity the most (i.e., the runway capacity is
allocated on a first-come first-serve basis rather than on the basis of the value of that capacity to
prospective users).

6.17 To promote efficiency in distribution of the electromagnetic spectrum, trade should be

permitted in spectrum rights. By allowing such trade, spectrum will end up being allocated to the
highest value use.

6.18 False. Normative/equity reasons could lead one to prefer an inefficient (but more equitable)
distribution to one that is efficient.

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