Suppose that there are two goods, apples and oranges, and two individuals, John and Mike.
John has four apples and two oranges, and Mike also has four apples and two oranges. We will call this “point A.”
A. Define what it means for an allocation of goods to be (Pareto) efficient.
B. What technical condition must hold for an allocation to be efficient?
C. Can you tell whether this allocation of apples and oranges (point A) is efficient? Why or why not?
D. Define the contract curve and explain the connection between the contract curve, efficient allocations, and the possibility of mutually beneficial trade.
E. Suppose that John and Mike are identical twins and have the same preferences (same utility function). Is this information of any use in deciding whether point A is efficient? Why or why not?
F. Mr. E. Konmajor says that if John and Mike have the same preferences, their contract curve is a straight line between the two corners (lower left and upper right) of the Edgeworth box. Is he right? Explain.