Gilbert and Gilmore live on a planet called Edgeworth Box, where there are only two goods to consume, cheese and crackers. What’s more, there is a fixed amount of cheese and crackers; neither Gilbert nor Gilmore can produce more, and the planet does not have soil fertile enough to grow cheese or crackers.
Fortunately, they can trade the amount of cheese and crackers they were born with amongst each other, and they’ve been living long enough such that they have traded to a Pareto efficient point. At this Pareto efficient point, Gilbert has a marginal rate of substitution of 2/1, cheese to crackers (i.e., Gilbert is willing to trade 1 cheese for 2 crackers).
Assuming the Pareto efficient point is not a corner solution, what is Gilmore’s marginal rate of substitution at this Pareto efficient point? If crackers cost \$1, how much does cheese cost?
Gilmore's marginal rate of substitution is
and cheese costs
if crackers cost \$1.