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Unformatted text preview: Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Exchange Economy 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 29, 2007 Lecture 19 Eciency in Exchange, Equity and Eciency, and Eciency in Production Outline 1. Chap 16: Exchange Economy 2. Chap 16: Contract Curve 3. Chap 16: General Equilibrium in a Competitive Market 4. Chap 16: Utility Possibilities Frontier 5. Chap 16: Production in Edgeworth Box 1 Exchange Economy In the Edgeworth box (see Figure 1) given endowment E , the area between As and Bs utility curves contains all beneficial trades, but not all are ecient; that is to say, both A and B are better off in this area, but they will keep trading until they cannot make both of them better. Then the possible ecient allocation given the endowment E should satisfy that: there is no more room for trade, thus MRS A = MRS B . 2 Contract Curve Contract curve shows all possible ecient allocations; it contains all points of tangency between As and Bs indifference curves (see Figure 2). 3 General Equilibrium in a Competitive Market Assume that consumers are price-takers. There are two consumers, A and B, and two goods, X and Y, in the market. The total endowment of X is x units, Cite...
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This note was uploaded on 04/26/2009 for the course ECON MICRO taught by Professor Chen during the Spring '09 term at MIT.
- Spring '09