Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 14] GENERAL EQUILIBRIUM AND WELFARE ECONOMICS 313
economy will thus be in equilibrium when on its contract curve (i.e., whenever the MRS xy for A equals the MRS xy for B). The
above figure is usually referred to as an Edgeworth box diagram.
Fig. 14-1
14.3 GENERAL EQUILIBRIUM OF PRODUCTION
A producer of two commodities (X and Y) using two factors (L and K) reaches general equilibrium of
production whenever the marginal rate of technical substitution between L and K (MRTS LK ) in the production
of X is equal to the MRTS LK in the production of Y. We can show the general equilibrium of production for
this economy by utilizing Edgeworth box diagram.
EXAMPLE 2. In Fig. 14-2, every point in (or on) the box represents a particular use of the 14 units of L and the 12 units of
K available to this economy. For example, point R indicates that 3L and 10K are used to produce X 1 of commodity X and the
remaining 11L and 2K to produce Y l of commodity Y. Three of X’s isoquants (with origin at O x ) are X 1 ,X 2 , and X 3 ; Y’s
isoquants (with origin at O y ) are Y l ,Y 2 , and Y 3 .
Fig. 14-2