Answer to Question #237294 in Microeconomics for Supriya

Question

Consider an Edgeworth box that describes a two-person, two-commodity exchange scenario. Explain how trade takes place between the two individuals starting from the initial endowment position. What is the significance of the slope of the ray passing through a Pareto optimal point and the endowment point

Answer 1

Individual 1 is located in the lower left (south west) corner and individual 2 in the upper right (northeast) corner.

The X good is given on the horizontal while the Y good is given on the vertical axis. The distance between them indicates the total amount of goods available between them. The total amount of goods available to each individual is fixed.

Individual 1 will obtain ($X_1,Y_1$) while individual 2 will obtain ($X_2,Y2$ ).

The significance of the slope of the ray through pareto optimal point and endowment point is that it indicates the economic notion of efficiency, which indicates that an allocation is efficient if it is impossible to make one individual better of without doing harm to the other individual. This is because the only way to improve the utility of individual 1 is to harm the utility of individual 2 and vice versa.