{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Econ 19 - 1 Exchange Economy 1 14.01 Principles of...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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 Efficiency in Exchange, Equity and Efficiency, and Efficiency 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 A’s and B’s utility curves contains all beneficial trades, but not all are efficient; 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 efficient 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 efficient allocations; it contains all points of tangency between A’s and B’s 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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}