Question

Sketch a utility possibilities frontier depicting the variation in utility levels. Explain what is conveyed by the general shape of the frontier.

Answer 1

Utility possibilities frontier depicts the efficient level of utility. Overall utility is maximized in utility possibility frontier.

Following is diagram:

In above utility possibility frontier, all points in OA and OB are efficient and all points below the possibility frontier are inefficient. Movement from H to G shows that efficiency has been gained but it does not necessarily means that equity principle has been realised.

Shape of utility possibility frontier shows that how exchanges between individuals are materialised. Utility possibility frontier is drawn based on the contract curve.