Ebook Microeconomics (7th edition): Part 2
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Ebook Microeconomics (7th edition): Part 2
31 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars an Ebook Microeconomics (7th edition): Part 2nd 30 cords of firewood. She is indifferent between that bundle and the others that lie on her indifference curve /,*. (bl Denise is indifferent between her endowment, Ebook Microeconomics (7th edition): Part 2ombining panels a and b. Jane prefers bundles in A and H to e. Denise prefers bundles in H and c to e. Thus, hoth prefer any bundle in area H to e.TheEbook Microeconomics (7th edition): Part 2
height of the Edgeworth box represents 50 cords of firewood, and the length represents 80 candy bars, which are the combined endowments of Jane and D31 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars an Ebook Microeconomics (7th edition): Part 2d 20 candy bars at endowment e. Similarly, measuring from Denise’s origin, oư, at the upper-right corner, we see that Denise has 60 bars of candy and 20 cords of firewood at e.10.2 Trading Between Two People 319Mutually Beneficial TradesShould Jane and Denise trade? The answer depends on their taste Ebook Microeconomics (7th edition): Part 2s, which arc summarized by their indifference curves. We make four assumptions about their tastes and behavior:Utility maximization. Each person maximEbook Microeconomics (7th edition): Part 2
izes her utility.Usual-shaped indifference curves. Each person’s indillerence curves have the usual convex shape.Nonsatiation. Each person has strictl31 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars an Ebook Microeconomics (7th edition): Part 2Neither person's utility depends on rhe other's consumption (neither person gels pleasure or displeasure from the other’s consumption), and neither person’s consumption harms the other (one person's consumption of firewood docs nor cause smoke pollution that bothers the other person).I igure 10.3 re Ebook Microeconomics (7th edition): Part 2flects these assumptions. In panel a, Jane’s indifference curve, //, through her endowment point, t’p is convex to her origin. 0,. Jane is indifferentEbook Microeconomics (7th edition): Part 2
between e/ and any other bundle on /,'. she prefers bundles that lie above /? to e/ and prefers Cj to points that lie below I'. Panel c also shows he31 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars an Ebook Microeconomics (7th edition): Part 2Similarly, Denise’s indillerence curve, /}, through her endowment is convex to her origin. 0,i, in rhe lower left of panel b. This indifference curve, Ij, is still convex to Oj in panel c, bur Oj is in rhe upper right of the Edgeworth box. (It may help to rum this book around when viewing Denise’s i Ebook Microeconomics (7th edition): Part 2ndillerence curves in an Edgeworth box. Then again, possibly many points will be clearer if rhe book is held upside down.) rhe bundles Denise prefersEbook Microeconomics (7th edition): Part 2
to her endowment are in shaded areas B and which lie on the other side of her indifference curve Ij from her origin o.y (above 1} if you turn the hook31 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars an Ebook Microeconomics (7th edition): Part 2es in B and c to e, so both prefer bundles in area B to their endowment ar e.Suppose I hat I hey trade, reallocating goods from Bundle e to f. Jane gives up 10 cords ol firewood for 20 more candy bars, and Denise gives up 20 candy bars lor 10 more cords of wood. As Figure 10.4 illustrates, both gam Ebook Microeconomics (7th edition): Part 2from such a trade. Jane’s indifference curve /,' through allocation /lies above her indillerencecurve /' through allocation e, so she is better off atEbook Microeconomics (7th edition): Part 2
/ than ar e. Similarly, Denise’s indifference curve /J through /lies above (il you hold the book upside down) her indifference curve IJ through e, so31 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars an Ebook Microeconomics (7th edition): Part 2 repeat our analysis. Jane prefers all bundles above //, her indifference curve through /. Denise prefers all bundles above (when the book is held upside down) /j’ to /. However, they do nor both prefer any other bundle because /r and I] are tangent ar /. Neither Jane nor Denise wants to trade from Ebook Microeconomics (7th edition): Part 2/ to a bundle such as e, which is hclow both of their indifference curves. Jane would love to trade from /to e, which is on her higher indifference cuEbook Microeconomics (7th edition): Part 2
rve //, but such a trade would make Denise worse off because this bundle is on a lower indifference curve, /J. Similarly, Denise prefers b to /, but J31 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars an Ebook Microeconomics (7th edition): Part 2 of substitution (the slope of her indifference curve), MRS,, between wood and320 CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.4 Contract CurveThe cuntract curve contains all the Pareto-efficient allocations. Any bundle tor which Jane’s indifference curve is tangent tv Denise’s indif Ebook Microeconomics (7th edition): Part 2ference curve lies on the contract curve. At such a bundle, because no further trade is possible, and we can’t real locale goods to make one of them bEbook Microeconomics (7th edition): Part 2
elter off without harming the other. Starting at an endowment of e, Jane and Denise will trade to a bundle on rhe contract curve in area H: bundles be31 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars an Ebook Microeconomics (7th edition): Part 2enise2060110203040candy equals Denise’s marginal rate ol substitution, AIR.Sy Jane’s A'fR.S, is — Ị: she is willing to trade one cord of wood for two candy bars. Because Denises indifference curve is tangent to Jane’s, Denise’s AfR.Sj must, also be —7. When they both want to trade wood for candy ar Ebook Microeconomics (7th edition): Part 2rhe same rare, they can’t agree on further trades.In contrast, at a bundle such as e where their indifference curves are not tangent, AIRS, does not eEbook Microeconomics (7th edition): Part 2
qual AIRS./. Denise’s AIRSj is — I, and Jane’s AfRS, is —2. Denise is willing to give up one cord of wood for three more candy bars or to sacrifice th31 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars an Ebook Microeconomics (7th edition): Part 2 up two cords of wood for one candy bar. This example illustrates that trades are possible where indifference curves intersect because marginal rates of substitution are unequal.To summarize, we can make four equivalent statements about allocation /:1The indifference curves of rhe two parries arc ta Ebook Microeconomics (7th edition): Part 2ngent at f.2The parties’ marginal rates of substitution arc equal ar f.3No further mutually beneficial trades arc possible at f.4The allocation at f iEbook Microeconomics (7th edition): Part 2
s Pareto efficient: One party cannot be made better offcontract curve the set ot all Pareto-efficient bundleswithout harming the other.Indifference cu31 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars an Ebook Microeconomics (7th edition): Part 2 curve: the set of all Pareto-efficient bundles. The reason for this name is that only at these points arc the parties unwilling to engage in further trades or contracts—these alloca* tions are rhe final contracts. A move from any bundle on the contract curve would harm at least one person. Ebook Microeconomics (7th edition): Part 231 s CHAPTER 10 General Equilibrium and Economic WelfareFigure 10.3 Endowments in an Edgeworth Box(a| Jane’s endowment is e,; she has 20 candy bars anGọi ngay
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