Question

A Pareto-efficient point may not be attainable as a market equilibrium when indifference curves are not convex for one of the consumers b) it is a point lying on the edge of the Edgeworth box c) the Edgeworth box is not a square d) the goods are perfect complements for one of the consumers e) All of the remaining answers are correct. ach of eleven consumers is making a decision whether to join a network. We can order them according to their preferences so that for consumer n the willingness to pay for connecting to the network of size k (including himself) amounts to kn. What is the highest cost of connecting to the network with which the network of size 11 can be created?

Answer 1

There are two fundamental theorem of welfare economics -

1. First welfare theorem: Any competitive equilibrium can lead to a Pareto optimal allocation of resources.
2. Second welfare theorem: Any arbitrary Pareto optimal allocation can be achieved from a competitive equilibrium if we allow redistribution/transfers in market mechanisms and there are no non convexities.

Assumptions for SWT-

• No externalities
• Convexity of production sets
• Convexity and local non-satiation of preferences

A point can lie on the boundary of edgeworth box (square or rectangle) since the contract curve passes through it and can still be competitive equilibrium.

The graph for perfect complements is also covered under this case.

There are two fundamental theorem of welfare economics - 1.First welfare theorem: Any competitive equilibrium can lead to a Pareto optimal allocation of resources. 2.Second welfare theorem: Any arbitrary Pareto optimal allocation can be achieved from a competitive equilibrium if we allow redistribution/transfers in market mechanisms and there are no non convexities. Assumptions for SWT - No externalities Convexity of production sets Convexity and local non-satiation of preferences A point can lie on the boundary of edgeworth box (square or rectangle) since the contract curve passes through it and can still be competitive equilibrium. The graph for perfect complements is also covered under this case. Alf�s indifference curves Bill�s indifference curves The contract curve Set of efficient allocations is the contract curve Includes cases where Alf or Bill is very poor The contract curve An efficient allocations Supporting price ration = MRS The property distribution A lump -s um transfer Support allocation by a CE This needs adjustment of the initial endowment Lump - sum transfer may be tricky to implement

Correct Ans - A