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    Edgeworth box diagram

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    There is a pure exchange economy with two identical consumers, A and B. Consumer A has 8 units of good 1 and 4 units of good 2. Consumer B has 4 units of good 1 and 8 units of good 2.

    a) Show in an Edgeworth box diagram what a competitive ( price taking) equilibrium would look like in this economy.
    b) Is this competitive equilibrium efficient? Explain.
    c) Suppose that for some reason we wish the outcome in which A gets 8 of each good, and B gets 4 of each good to arise in this economy. Under what circumstances could we achieve this outcome in a competitive equilibrium? Explain.

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    Solution Preview

    Please see the attached file.

    There is a pure exchange economy with two identical consumers, A and B. Consumer A has 8 units of good 1 and 4 units of good 2. Consumer B has 4 units of good 1 and 8 units of good 2.

    a) Show in an Edgeworth box diagram what a ...

    Solution Summary

    Edgeworth box diagram is formulated in the solution.

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