Coursenotes_ECON301

Of course if the allocation cannot be further

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Unformatted text preview: erently than most by using a three step graphical representation. This is so you will understand the configuration of the box, as well as, the dimensions and labelling features. The first step is to imagine our two consumers, A and B, with their indifference curves in our normal depiction of a quadrant space. Next, we take the axes for consumer B and flip them around the point Z in the first diagram. This results in the second diagram. In the second diagram, we flip consumer B's axes again but this time upward (around the point S in diagram 2 below. This results in diagram three which is the Edgeworth Box. Y A YB Imagine a scenario where we have the two consumers in a similarly configured quadrant space, as below. ICB IC A Z XB XA 156 S YB YA ICB IC XB XA A Then we turn consumer B's axes up, flipping upwards around the point S. In the box below we have the finished product...an Edgeworth box. YA XB ICB OB ICA OA Y B XA This box must be of the dimensions described in equations (1) and (2) above to represent the feasible allocations in the economy. Let's consider what this means... 157 Y = YA + YB XB OB YB Endowment Point YA OA XA X = XA + XB The box must have the following properties: [1] The total dimension of the box is X by Y. The size of the box is determined by the total amounts of both goods available in the economy. As a result, we cannot have a "feasible allocation" outside the boundary of the box. This does not say that consumer demands are not well defined outside the boundary of the box...they are well defined just not feasible given the economy's resources. [2] One person, say A, has their origin at the southwest corner (bottom left) of the box while the other person, say B, has their origin at the northeast corner (top right) of the box. This is what we showed above graphically. [3] At any point of the box, either on the interior or on the boundary, now represents a "feasible allocation" (XA, XB, YA, YB) which satisfy equations (1) and (2) above. Note that corner OA represents the ext...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.

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