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

326 GENERAL EQUILIBRIUM AND WELFARE ECONOMICS [CHAP. 14
B. (b) Starting at the point where indifference curve A 1 crosses indifference curve B 1, show that
mutually advantageous exchange is possible (c) How do we get the consumption contract curve?
What does it show?
Table 14.2
A’s Indifference Curves
B’s Indifference Curves
A 1 A 2 A 3 B 1 B 2 B 3
X Y X Y X Y X Y X Y X Y
5 60 25 45 15 65 5 20 10 50 35 60
15 25 35 35 40 55 20 15 25 35 45 45
30 15 50 30 55 53 55 10 40 33 55 40
(a)
The Edgeworth box diagram for individuals A and B is given in Fig. 14-12. Every point in (or on)
the Edgeworth box represents a particular distribution between individuals A and B of the 60X
and 70Y produced (at point M 0 on the transformation curve of Fig 14-11). For example, point H
indicates that A has 5X and 60Y, while B has the remaining 55X and 10Y. A’s indifference curves
(i.e., A 1 , A 2 , and A 3 ) have origin at O A , while B’s indifference curves (i.e., B 1 , B 2 , and B 3 ) have
origin at O B .
Fig. 14-12
(b)
At point H (where A 1 crosses B 1 ), the slope of A 1 (i.e., the MRS xy for A) exceeds the slope of B 1 (i.e., the
MRS xy for B), and so there is a basis for mutually advantageous exchange. For example, starting-at point
H (on A 1 and B 1 )ifA gives up 25Y in exchange for 30X from B, A and B move to point D (on A 2 and
B 1 ), and so both are better off. At point D, A 2 is tangent to B 2 ; that is, the (MRS xy ) A is equal to the
(MRS xy ) B , and so there is no further basis for mutually advantageous exchange. The greater A’s bargaining
strength, the closer the final equilibrium point of exchange will be to point E (see Fig. 14-12) and the more A’s
gain from the exchange relative to B’s. The greater B’s bargaining strength, the closer the final equilibrium
point of exchange will be to point C and the more B’s gain from the exchange relative to A’s.