Question

Explain and illustrate with a diagram the Efficient Contracts model. Why do we find employers reluctant to negotiate over wages and employment levels.

Answer 1

At points of tangency of indifference curves in an Edgeworth box the Blue curve of Pareto efficient points,. If the initial allocations of the two goods are at a point not on this locus, then the two people can trade to a point on the efficient locus within the lens formed by the indifference curves that they were originally on. The set of all these efficient points that could be traded to is the contract curve. In the graph below, the initial endowments of the two people are at point X, on Kelvin's indifference curve K₁ and Jane's indifference curve J₁. From there they could agree to a mutually beneficial trade to anywhere in the lens formed by these indifference curves. But the only points from which no mutually beneficial trade exists are the points of tangency between the two people's indifference curves, such as point E. The contract curve is the set of these indifference curve tangencies within the lens—it is a curve that slopes upward to the right and goes through point E.

Every situation unique we find employers reluctant to negotiate over wages and employment levels because-

1. We  underestimate the importance of likabilityand donot help them understand why you deserve what you’re requesting.

2.We don't make it clear that they can get you and don't Understand their constraints.

3. We must focus on the questioner’s intent, not on the question.