Question 4 0 1 pts In a two-individual two-good economy, which of the following

Question

Question 4 0 1 pts In a two-individual two-good economy, which of the following is FALSE? You Answered If the initial endowment is on the contract curve, the two individuals cannot achieve Pareto improvement by exchanging the goods. If the initial endowment is in the top-left corner of the Edgeworth box, and assuming convex indifference curves, the two individuals can achieve Pareto improvement by exchanging the goods. The Pareto optimal allocation is achieved at a point of tangency between the indifference curves of the two individuals. Correct Answer The Pareto optimal allocations are achieved at points of intersection between the indifference curves of the two individuals

Explanation / Answer

Along a contract curve all points represent bundles that have marginal rate of substitution of one consumer equal to the marginal rate of substitution of the other consumer. This implies that the two indifference curves are tangent to each other at all points along the contract curve. Now the contract curve connects all those final allocations that occur after the mutually beneficial trade has happened between two people in relation to their initial allocation.

Hence, when initial allocation is on the contract curve it must be satisfying the principle of equality between MRS of two individuals so that no further trade is likely to increase benefit of any one consumer without reducing the benefit of other. Hence A is true.

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