Chapter 16 Edworth Box

Chapter 16 Edworth Box - Efficiency in Exchange As we know,...

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Chapter 16 (16.2) Efficiency in Exchange P’ O Tuitional EBA Microeconomics Efficiency in Exchange • As we know, competitive market is efficient because it maximizes consumer and producer surplus. • Exchange economy : Market in which two or more consumers trade two goods among themselves. • Efficient allocation (Pareto Efficient) : Allocation of goods in which no one can be made better off unless someone else is made worse off. The advantage of trade Individual Initial Allocation Trade Final Allocation V 7F,1C -1F,+1C 6F, 2C New 3F, 5C +1F,-1C 4F,4C New has a lot of clothing and little food, her MRS of food for clothing is 3:1, she will give up 3 C for 1 F. V’s MRS of food for clothing is ½. V values clothing more highly than New does, whereas New values foods more highly than V does. • The actual terms of trade depend on the bargaining process. • Among the possible outcomes are trade of 1F by V for anywhere between ½ and 3 units of clothing from New. • Economic efficiency: The two consumers’ MRSs
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This note was uploaded on 10/13/2010 for the course ECON Mi22 taught by Professor Miko during the Spring '10 term at UC Riverside.

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Chapter 16 Edworth Box - Efficiency in Exchange As we know,...

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