The graph on the next page shows the Edgeworth box, and indifference curves, for two people, Matthew (M) and Nia (N). Each person starts with an endowment of Good X and Good Y. The origin for Matthew's indifference curves (OM) is in the lower left corner, and his indifference curves increase to the northeast from that point. The origin for Nia's indifference curves (ON) is in the upper right corner; her indifference curves increase to the "southwest" (moving in the direction towards the origin of Matthew's indifference curves). The current endowment for this small economy is at point A. a. Briefly explain why Matthew and Nia can potentially gain from trade, starting from point A. Be sure to include the concept of the marginal rate of substitution in your answer. b. Briefly explain why the point E represents a re-allocation of the endowment (a trade) that will make both Matthew and Nia better off than at point A. c. Once at point E, briefly explain why any further trading would make at least one person worse off than at point E. d. Returning to point A as the starting point, explain why point B would not represent a mutually beneficial trade. Who would be better off, and who would be worse off, at point B as compared to point A?
The graph on the next page shows the Edgeworth box, and indifference curves, for two people, Matthew (M) and Nia (N). Each person starts with an endowment of Good X and Good Y. The origin for Matthew's indifference curves (OM) is in the lower left corner, and his indifference curves increase to the northeast from that point. The origin for Nia's indifference curves (ON) is in the upper right corner; her indifference curves increase to the "southwest" (moving in the direction towards the origin of Matthew's indifference curves). The current endowment for this small economy is at point A. a. Briefly explain why Matthew and Nia can potentially gain from trade, starting from point A. Be sure to include the concept of the marginal rate of substitution in your answer. b. Briefly explain why the point E represents a re-allocation of the endowment (a trade) that will make both Matthew and Nia better off than at point A. c. Once at point E, briefly explain why any further trading would make at least one person worse off than at point E. d. Returning to point A as the starting point, explain why point B would not represent a mutually beneficial trade. Who would be better off, and who would be worse off, at point B as compared to point A?
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.9P
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Transcribed Image Text:The graph on the next page shows the Edgeworth box, and indifference curves, for two
people, Matthew (M) and Nia (N). Each person starts with an endowment of Good X and
Good Y. The origin for Matthew's indifference curves (OM) is in the lower left corner, and
his indifference curves increase to the northeast from that point. The origin for Nia's
indifference curves (ON) is in the upper right corner; her indifference curves increase to the
"southwest" (moving in the direction towards the origin of Matthew's indifference curves).
The current endowment for this small economy is at point A.
a. Briefly explain why Matthew and Nia can potentially gain from trade, starting from
point A. Be sure to include the concept of the marginal rate of substitution in your
answer.
b. Briefly explain why the point E represents a re-allocation of the endowment (a
trade) that will make both Matthew and Nia better off than at point A.
c. Once at point E, briefly explain why any further trading would make at least one
person worse off than at point E.
d. Returning to point A as the starting point, explain why point B would not represent
a mutually beneficial trade. Who would be better off, and who would be worse off,
at point B as compared to point A?
Transcribed Image Text:ON.
A
E
F
Good X
OM
A po05
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