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ClassOf1 Pareto Efficiency Two

# ClassOf1 Pareto Efficiency Two

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Pareto efficiency in two persons two goods economy with given initial endowment for both of them
Pareto efficiency in two persons two goods economy with given initial endowment for both of them

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03/14/2013

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ClassOf1provides exert guidance for College, Graduate and High schoolhomework and liveonline  tutoring on subjects likeFinance, Marketing,Statistics, Economicsand others. Check out more solved   problems in our Solution Library.

Sub: Economics Topic: Micro Economics
Question:
Pareto efficiency in two persons two goods economy withgiven initial endowment for both of them
Consider the following two person- two good pure exchange economy:Alfred’s utility function is
UA
(X, Y) = min {X, Y} and Bob’s utility function is
UB
(X, Y) = max{X, Y}.a) Suppose that Alfred’s initial endowment is
ωA
= (2, 8) and Bob’s initialendowment is
ωB
= (8, 2). If there is any, given an example to an allocationwhich is feasible but NOT Pareto Efficient. Explain why it is not ParetoEfficient.b) Suppose now that Alfred’s initial endowment is
ωA
= (8, 2) and Bob’sinitial endowment is
ωB
= (2, 3). If there is any, given an example to anallocation which is feasible but NOT Pareto Efficient.(HINT: No calculation is necessary. Just use the definition of ParetoOptimality and properties of the utility functions.)
Solution:
a
)PARETO OPTIMALITY
Pareto efficient allocation is one where:
There is no way to make some individual better off without makingsomeone worse off There are no mutually beneficial exchanges as all gains from tradehave been exhausted
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Sub: Economics Topic: Micro Economics
If there is a way to make a people better off without making anybody worseoff, we have a Pareto Improvement. If an allocation allows Paretoimprovement, it is called Pareto inefficient and if an allocation is no suchPareto improvements are possible, it is called Pareto efficient. The given utility functions are The first one is Alfred’s Utility function and the Second one is Bob’s Utilityfunction The initial endowment for Alfred is WA= ( 2,8) and the initial endowment forBob is ( 8,2) The indifference curves of Bob are convex to the origin and the indifferencecurves of Alfred are Leontief. The set of Pareto optimal allocations is the 45 degrees line in the EdgeworthBox. That is, the set {x11,x12,x21,x22} such that {xA1=xA2, xB1 = xB2,xA1 + xB1 = 10, xA2+xB2 = 10}.One feasible allocation is x11=5, and x12=5Such that Alfred can trade 3 units of good 2 to Bob and can have 3 units of good X from BobSo that again xA1 + xB1 = 5+5=10,xA2+xB2 = 5+5=10
www.classof1.com
*
The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not forsubmitting the same inlieu of your academic submissions for grades.