Answer to Question #247164 in Microeconomics for Chilu

Question

The Edgeworth box diagram can also be used to show how a production possibility frontier is constructed for an economy as a whole. Suppose there are only two goods that might be produced (X and Y), each using two inputs, capital (K) and labor (L). In order to construct the X Y production possibility frontier, we must look for efficient allocations of the total capital and labor available. a.Draw an Edgeworth box with dimensions given by the total quantities of capital and labor available (see Figure 10.4).Consider the lower-left corner of the box to be the origin for the isoquant map for good X. Draw a few of the X isoquants. b.Now consider the upper-right corner of the box to be the origin for the isoquant map for good Y. Draw a few Y isoquants (as in Figure 10.5) in the Edgeworth box. c.What are the efficient points in the box you have drawn? What condition must hold for a given allocation of K and L to be efficient?

Answer 1

Edgeworth diagram is used to show the various distributions of resources. It also can be used show how a production frontier is constructed for an economy as a whole.

a. Edgeworth box

Edgeworth diagram is used to show the general equilibrium. It represents various allocations of resources. Following is the diagram:

Total of labor has been measured along the horizontally and total capital has been shown vertically.

b. Isoquants of good X.

Good X has been shown in lower left corner of box. Isoquants have been drawn. Isoquants shows the different combination of labor and capital that produce certain level of production. All combinations in single isoquants produce same production. Higher isoquant represents the higher level of production. Following is the diagram:

The isoquants IQ_y^1, IQ_y^2, IQ_y^3 and IQ_y^4 denote different productions. Isoquant IQ_x^4 shows the highest level of production. Producer always seeks to achieve this level. Collection of isoquants is known as isoquant map.

b. Isoquant of good Y

Good Y has been shown in upper right corner. Isoquants for goodhave been drawn. Following is complete diagram:

The isoquants IQ_y^1, IQ_y^2, IQ_y^3 and IQ_y^4 are showing different level of production.

c. Efficient point

Points P, P_1, P_2 and P_3 are efficient points in Edgeworth box diagram. Main condition for points being efficient is that Marginal rate of technical substitution (MRTS) between X and Y should be same.