Answer to Question #295578 in Microeconomics for Zack

Question

Assuming there are 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

To apply the Edgeworth box, we must plot indifference curves for both individuals on the same graph, assuming that one receives all leftovers after the other and that the total quantity of good X and good Y is 5 and 5 respectively (as an example). As a result, one of the graphs is rotated 180 degrees.

A Pareto optimal allocation of commodities is one in which it is impossible to improve one person's status without degrading the status of others. The indifference curves of person 'A' are simply tangent to person 'B' at point 'T,' as depicted visually in the image above.

Because indifference curves create a "lens" in the space of the Edgeworth box, every point within it moves each of the participants to a greater level of utility, present bundles are not at optimum. In the Edgeworth box, Pareto optimum allocation occurs at the point of contact, not at the intersection of indifference curves. However, because the point of contact, in this case, is between the fractional units of good X and good Y, discrete ones are chosen.