Question

Your airplane crashes in the Pacific Ocean. You land on a desert island with one other passenger. A box containing 100 little bags of peanuts also washes up on the island. The peanuts are the only thing to eat. In this “economy” with two people, one commodity, and no production, represent the possible allocations in a diagram, and explain why every allocation is Pareto efficient. Is every allocation fair?

***POST GRAPH******

Answer 1

Solution,

In the given case, the Edgeworth box will only be a straight line between the two consumers because there is only one good.

Let X be the number of bags allocated to you and Y be the number of bags allocated o the other passenger.

Since total quantity of peanuts is 200, X+Y = 200 will represent the Edgeworth box.

Every allocation point on this line will be Pareto efficient because in any case, one person cannot be made better off without making other one worse off.

The line XY represents the set of Pareto efficient points.