Question

Friday Contract curve Y (rum) Core Robinson X (bread) Figure 15.6 The contract curve and the core. (Robinson is blue; Friday is green.)

Answer 1

3. a. yes. they are likely to trade from point W. because at point W they don't have the same MRS. hence both of them prefer one good more than the other hence they are ready to trade and get to a higher satisfaction level.

b. yes, it is Pareto improving.

because moving from W to B,

i. Friday stays on the same utility level.

ii. Robinson gets to a higher utility level.

hence Robinson is better off without making Friday worse off hence it is a Pareto improvement,

c. if point C is on the contact curve then it won't change the efficiency as the MRS both the persons are equal and the point is Pareto efficient. But it will change equity as now total satisfaction and amount of total goods of both the persons are more equal than point B because at point B Robinson has more utility(hence goods) than those of Friday.

d. Yes, this Edgeworth box diagram can be extended to many people and many good.

i. we have to extend the discussion to a particular good and a composite good to get the idea about the whole situation.

ii. we have to extend the dimension from 2x2 to nxn framework(n can be any number higher than 2) but we may not get a diagram but the theoretical discussion still remains the same.

an equation that describes such equilibrium may be MRS1=MRS2=MRS3=................=MRSn where MRSX mans the MRS in terms of a good and a composite good of the xth individual.

explanation: if all individuals in the economy have the same level of marginal utility ratio of a good and the composite goods then the economy will be at the highest efficiency level.

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