Unformatted text preview: B ’s origin is in the upper-right corner of the Edgeworth Box). Solving the problem for each pair of utility functions and endowment is easy to do, just follow these steps: Step 1: First you draw the Edgeworth Box. Make sure the box has the correct dimensions, so that the q 1 axis has length e A 1 + e B 1 and the q 2 axis has length e A 2 + e B 2 . Step 2: Next you ﬁnd the endowment in the box. The point labeled e should reﬂect the endowments e A = ( e A 1 ,e A 2 ) and e B = ( e B 1 ,e B 2 ) of A and B , respectively. Step 3: Then you draw the indiﬀerence curves in the box. Again, their slopes will be equal to the MRS of each consumer. We are particularly interested in the indiﬀerence curves through the endowment, so we must evaluate the MRS at the endowment. If MRS A 6 = MRS B at e , then there is scope for mutually beneﬁcial trades. And that’s the way you do it! Remember, every type of preference has indiﬀerence curves in the box. 1...
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- Winter '08
- Utility, indifference curves, Binary relation, edgeworth box, mutually beneficial trades