Question

how can yiu tell a movement on an edgeworth box is a pareto improvement? also how fo you find possible competitive equilibrium line segments on the box? and how do you decide if an allication point us pareto efficient?

Answer 1

Pareto efficiency is said to be achieved in a situation when it cannot be modified so as to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off.

In the diagram above, the allocation A0 is not Pareto efficient because it is still possible to exchange commodities between two individuals to make them both better off.

The allocation A’ is Pareto superior than A0 since both are better off than before. Thus, it is said to be pareto improvement.

The allocation A2 is superior to A0. In the above diagram, allocation cannot cross the indifference curves. This is because all allocations are Pareto optimal.

Thus, all those combinations that are on contract curve are pareto efficient.