Answer to Question #219258 in Microeconomics for Danu

Question

a.    Construct an edge worth box diagram and show how production, efficiency and

equilibrium is achieved in an economy.                                                       (10Marks)

Answer 1

The Edgeworth chart is a convenient tool for analyzing production and resource allocation in an economy with a fixed supply of labor and capital.

The Edgeworth diagram, literally referred to as the Edgeworth box, is named after the English economist Francis Edgeworth, who used a similar method of analysis in his book Mathematical Psychology. Essay on the Application of Mathematics to the Moral Sciences ”1881 the next approach to the analysis of the exchange process.

An Edgeworth chart is a rectangle whose sides represent the number of resources available to produce two goods. In analyzing this issue, we will proceed from the following assumptions:

- two types of production resources are used and their volumes are fixed;

- the economy consists of two firms;

- two products are produced.