EXERCISE 3: Exchange economy
J Wahl - Micro Principles
You and your roommate only care about two things -- steak and ale. Each of you receives a
CARE package from home containing these two items. Your package contains 20 steaks and 75
ales. Your roomie’s package has 50 steaks and 30 ales.
The following schedule represents each of your trading requirements:
YOU ROOMIE
number of steaks maximum number of ales minimum number of ales
you are willing to give up roomie must get to give up
to get given number of steaks given number of steaks
1 20 1
2 35 3
3 47 6
4 57 10
5 65 15
6 72 22
7 74 33
8 75 45
You and your roommate agree to strike a deal at a single price -- each ale you give up will garner
you the same number of steaks, once you've agreed on that "price." Put differently, you will
make a single exchange of steak for ale (or vice versa) rather than haggling over the price for
each individual steak. Recall, however, that MARGINAL matters when constructing supply and
demand curves.
1. Draw the demand and supply curves for steak.
2. Determine the number of equilibrium number of steaks that will change hands -- and the
"price" of steak.
3. Why is it beneficial for each of you to trade at the initial endowments?
4. Indicate on the D/S graph the gains from trade to each person.
5. Why is the equilibrium efficient (roughly, maximum gains from trade)?
6. How might your answers change if you could trade sequentially, rather than all at once?