Terry will trade four pizzas for one six-pack of beer and beequally happy. At the...

Terry will trade four pizzas for one six-pack of beer and be equally happy. At the same time, Dean will gladly exchange two of his six-packs for six pizzas. Is the allocation of beer and pizza Pareto efficient? Explain and provide a diagram.

Solutions

Expert Solution

We know that according to the Edgeworth box, Pareto efficiency will be accomplished when indifference curve of Hamlet and Ophelia are tangent to one another anytime. That point ought to be Pareto efficient.

From the given scenario the Ideal utility determined by Hamlet and Ophelia are not tangent by then as both are expecting an different exchange rate of Pizzas with Beer.

Hamlet needs one six pack of brew for two pizzas yet Ophelia needs 6 pizzas for 2 six packs of beer or 3 pizzas for 1 six pack of beer. Hence tangent point isn't accomplished.

Rahul Sunny answered 2 years ago

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