Question

1-Edgeworth box

a. Make an Edgeworth box by own choice of original person names and goods types.

b. Indicate a point in the box which is not Pareto optimal. Explain.

c. Indicate a point in the box which is Pareto optimal. Explain.

d. Can a skewed distribution of resources be Pareto optimal? Why or why not? Indicate your answer in the Edgeworth box.

Answer 1

1)a)

Here OA is the point of start for person A and OB for person B which at northeast end of the box. Going south and left would increase B's consumption while going right and Up would increase A's consumption. The ICs facing downward are of B and upward are of A. Higher the ICs from their respective sides, better off the consumer would be.

b) Point P on the edgeworth box is not pareto optimal. This is because from here one could be made better off without making someone else worse off. They could move more towards the centre, which would increase the availability of both the goods to both A and B without making either of some worse off.

c) Point Q is pareto optimal point. From P, the movement to Q is making both A and B better off. This is because both A and B are consuming more of both goods X and Y than before.

d) The edgeworth box could be skewed in rare cases. One such case could be when there are agroup of wealthy people on one side who own majority of share of goods and some poor people. Moving towards centre would mean equal distribution of resources but would also mean that the richer group is getting worse off. This could not be shown in the graph above because A and B are not at extreme ends of society ie too rich or poor.

(You can comment for doubts)