General equilibrium - Trade by Exchange

Question 1

we will see how trade will occur

Question 2

Endowment

Answer 2

The goods that the economy starts with

Question 3

Trade by exchange stages (pg66-72)

Answer 3

Each person prefers and allocation in the shaded lens, between both A and B’s indifference curves

Then move to a point inside the lens, called M, and draw new indifference curves through it and creating a new smaller lens (higher utility)

Continues until there is no more lens i,e no more allocations that would make either party (A and B) happier. No mutually improving trades ‘Pareto efficient allocation’

Question 4

Pareto efficient definition

Answer 4

No way to make one person better off without making another worse off.

Question 5

Is there only one unique Pareto efficient allocation?

Answer 5

No, we could’ve put M anywhere in between the 2 curves.

Each possible IC has a point of tangency with the other persons IC’s. When joining up we call it Pareto set

Question 6

Pareto-efficient curve/set

Answer 6

the points making up the Pareto-efficient curve represent all of the allocations that are Pareto-efficient. (I.e 2 IC’s are tangent

Question 7

So which allocations are efficient

Answer 7

Where the players IC’s are tangent (same slope)

Question 8

Why is tangency efficient

Answer 8

Since it means identical MRS.

Question 9

Problems even when some allocation is on the Pareto efficient curve

Answer 9

Players still face a problem and a conflict of interest on which Pareto efficient point to settle on if there are multiple (pg80)