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I'm currently reading Varian's Intermediate Microeconomics and what struck me, is this statement on page 89 of the 8th edition.

  1. If everyone faces the same prices for the two goods, then everyone will have the same marginal rate of substitution, and will thus be willing to trade off the two goods in the same way.

I mean, I see the mathematics behind it, but it still seems kind of hard for me to grasp intuitively. Could someone provide me with examples or another explanation to clear things up ?

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There are a couple of assumptions driving this result. For instance, all agents are assumed to have preferences and a budget such that their optimal bundle is interior. For example, budget constraints were people cannot afford food are ruled out. Likewise, situations, where someone does not like one of these goods or has very strong substitutions patterns between a pair of goods, are also ruled out. All preferences are assumed well-behaved (monotonic and strictly convex).

Secondly, the market is competitive, so all people face the same prices not only for tomatoes but also for airplanes, wages, etc. This almost never happens in reality, but in some cases, it is a good approximation. For example, when considering shopping for breakfast, the relative prices between cereal and yogurt and eggs roughly reflect the willingness for every person to substitute one good for another.

This is a striking result and I see it more of a theoretical benchmark whose main intuition is that prices contain a whole lot of information about how people are willing to substitute one good for another. When they don't, it is very interesting to understand why.

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