Consider the Edgeworth Box illustrated in the figure to the right. and lj are in

Question

Consider the Edgeworth Box illustrated in the figure to the right. and lj are individual J's indifference curves and I and I2 are individual d's indfference curves. Bundle e represents the initial endowment. Explain why point e in the figure to the right is not on the contract curve Bundle e is not on the contract curve because Contract curve O A. O B. one party cannot be made better off without harming the other from trade. both consumers can be made better off if consumer j trades candy for wood with consumer d. ° C. the consumers, marginal rates of substitution are equal at bundle e D. the consumers'indifference curves are tangent at bundle e. O E. both consumers can be made better off if consumer j trades wood for candy with consumer d andy

Explanation / Answer

E. both consumers can be made better off if consumer j trades wood for candy with consumer d.

j has too much of wood and d has too much of candy. With some exchange of wood from consumer j for the candy from consumer d, both can move to their respective higher indifference curve. When the indifference curves of both consumers will be tangent only then the alllocation will be optimal.

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