Answer to Question #221248 in Macroeconomics for Joe

Question

If C1= 30C, C2 = 60C, C3 = 90C and J1 = 50J, J2 = 70J, J3 = 80J;
Derive the transformation curve. (2 points)
Superimpose the Edgeworth box diagram of question C on the transformation curve, and determine the general equilibrium and Pareto optimal point of production and distribution.

Answer 1

a)

The transformation curve also known as the PPC (Production Possibility Curve) is the curve which shows the various combination of two goods which an economy can produce by full and efficient utilization of resources. 

b)The pareto-optimal situation is the one in which it is impossible to make anyone better off without making someone else worse-off. 

The pareto -optimal conditions for production is where, 

$MRTS^C_{L,K} = MRTS^J_{L,K}$

The pareto - optimality conditions for distribution is where, 

$MRPT_{XY} = MRS_{XY}^{C} = MRS_{XY} ^{J}$