Using Edgeworth box diagrams for a society of two people, explain why societies that promote market exchange are likely to be more efficient. Are they also likely to be more equitable?
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An Edgeworth be box is a way of representing the distribution of two goods. Using the resource provided, look at the first Edgeworth box displayed. It shows the amount of two goods (X and Y) distributed between two people. However, we can substitute societies for the people. The width of the box is the total amount of good X, and the height is the total amount of good Y. Thus, every possible division of the goods between the two societies can be represented as a point in the box. We assume that society A is more efficient at producing good A, while society B is more efficient at producing good B. Thus the societies have specialized, and each has only one good. Without trade the goods are allocated at the far right lower corner. Society A has only X, and Society B has only Y. As trade ...
The solution discusses the edgeworth box diagram for a society of two people.