Question

Consider an exchange economy with two people: John and James; and two goods: oranges and bananas. John's initial endowment is 10 oranges and 5 bananas. James's initial endowment is 5 oranges and 10 bananas. John likes oranges and hates bananas. James likes both oranges and bananas. The preferences of both John and James are strictly convex.

(a) Draw an Edgeworth Box with oranges on the horizontal axes. Put John at the bottom left corner and James at the top right corner. Show the initial endowment and label it with W.

(b) Find the contract curve

Answer 1

Part a)

Part b)

Contract curve is locus of Pareto efficient points

Since John doesn't like banana, so it's better if he gives up all of his Banana to James.

So as John likes oranges, so if he gives up any orange, then John will be worse off & James will be better off.

thus all allocations,from (0,0) to (10,0) are Pareto optimal , where no one can be made better off without making the other worse off.