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Question
Scenario 1:Irrespective of the amount of cheese doodles and pretzels that Sam consumes, his marginal rate of substitution of cheese doodles for pretzels is 2. Also, irrespective of the amount of cheese doodles and pretzels that Sally consumes, her marginal rate of substitution of cheese doodles for pretzels is 3.
Suppose instead that Sam is initially allocated 3 cheese doodles and 3 pretzels, whereas Sally is initially allocated 6 cheese doodles and 10 pretzels. Which of the following statements is TRUE?
A) This allocation is Pareto optimal.
B) This allocation is not Pareto optimal as Sally and Sam have unequal amounts of each good.
C) The allocation is not Pareto optimal as Sally would be willing to exchange two pretzels for one cheese doodle and be better off, without making Sam worse off.
D) The allocation is not Pareto optimal as Sam would willing exchange one pretzel for two cheese doodles and be better off, without making Sally worse off.
Answer
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