Pure exchange economy Assume that Adam and eve each have conventionally shaped indifference curves Adam's happiness increases as he consumes more therefore his utility is higher for bundles toward the northeast in the edgeworth box We can therefore draw standard" indifference curves for Adam in this picture. Adam would get even higher utility by moving further to the northeast, outside of the edgeworth Box but he is constrained by the resources on the island 6
6 Pure exchange economy • Assume that Adam and Eve each have conventionally shaped indifference curves. • Adam’s happiness increases as he consumes more; therefore his utility is higher for bundles toward the northeast in the Edgeworth Box. – We can therefore draw “standard” indifference curves for Adam in this picture. Adam would get even higher utility by moving further to the northeast, outside of the Edgeworth Box, but he is constrained by the resources on the island
Pure exchange economy Similarly, Eve's happiness increases as she consumes more; therefore her utility is higher for bundles toward the southwest in the edgeworth Box Eve's indifference curves therefore are flipped around her utility is higher on E3 compared E2 or E
7 Pure exchange economy • Similarly, Eve’s happiness increases as she consumes more; therefore her utility is higher for bundles toward the southwest in the Edgeworth Box. – Eve’s indifference curves therefore are “flipped around.” Her utility is higher on E3 compared E2 or E1
Figure 3.2 Eve E3 Er E A Apples per year
Figure 3.2
Pure exchange economy Suppose some arbitrary point in the edgeworth Box is selected, for example point g in Figure 3.3 This provides an initial allocation of goods to Adam and eve and thus some initial level of utility
9 Pure exchange economy • Suppose some arbitrary point in the Edgeworth Box is selected, for example point g in Figure 3.3. • This provides an initial allocation of goods to Adam and Eve, and thus some initial level of utility
Figure 3.3 E Eg g A Pareto efficient allocate Adam Apples per year
Figure 3.3