Question

Consider
an Edgeworth box that describes
two person two commodity exchange scenario. Explain how trade takes
place
between the two individuals starting from the
initial endowment position. What is
the significance
of the slope of the ray passing through a
Pareto optimal point and the endowment point?
​

Answer 1

Answer:

Explanation:

The Edgeworth box considers a two-person, two-good “exchange economy.” The Edgeworth box is a graphical representation of the exchange problem facing these people and also permits a straightforward solution to their exchange problem. A point in the Edgeworth box is the consumption of one individual, with the balance of the endowment going to the other.

Pareto efficiency is an allocation in which making one person better off requires making someone else worse off—there are no gains from trade or reallocation.

In the Edgeworth box, the Pareto-efficient points arise as tangents between isoquants of the individuals. The set of such points is called the contract curve. The contract curve is always increasing.