Answer to Question #124734 in Microeconomics for Ally Ahmed

Question

Assuming the two goods X and Y and two persons, analyze the exchange of goods between the two using the Edge worth Box framework indicating the Pareto efficient allocation

Answer 1

A point in the Edgeworth box is the consumption of one individual, with the balance of the endowment going to the other. Pareto efficiency is an allocation in which making one person better off requires making someone else worse off—there are no gains from trade or reallocation.

We can find the Pareto-efficient points by fixing Person 1’s utility and then asking what point, on the indifference isoquant of Person 1, maximizes Person 2’s utility. At that point, any increase in Person 2’s utility must come at the expense of Person 1, and vice versa; that is, the point is Pareto efficient.