Question

Raul has 4 Cal Ripken and 2 Nolan Ryanbaseball cards. The prices of these baseball cards are $24 for Cal and $12 for Nolan. Raul,however, would be willing to exchange 1 Cal card for 1 Nolan card.a)What is Raul’s marginal rate of substitution of Cal Ripken in place of Nolan Ryanbaseball cards?b)Can Raul buy and sell baseball cards to make himself better off? How?c)Suppose Raul has traded baseball cards and after trading still has some of each kind ofcard. Also, he now no longer wants to make any more trades. What is his marginal rate ofsubstitution of Cal Ripken in place of Nolan Ryan cards now?

Answer 1

Answer: a) 1

b) yes marginal rate of substitution is less than the relative price

c) 2.00

Explanation:

a) Raul’s marginal rate of substitution is 1 because he is only willing to trade 1 cal card for 1 additional Nolan card

b) Raul’s marginal rate of substitution is Mc/Mn = 1 However, the relative price of a Cal Ripken card is Pc/Pn = $24/$12 = 2.00. Since the marginal rate of substitution is less than the relative price, Raul can make himself better off by selling 1 Cal card and buying Nolan cards.

c) His marginal rate of substitution must be equal to the relative price; the relative price rule holds that says that Mc/Mn = Pc/Pn. From b above we know that the relative price is 2.00, Raul's marginal rate of substitution must also be 2.00.