End of Chapter Exercises Consider a 2-person/2-good exchange economy in which pe

Question

End of Chapter Exercises Consider a 2-person/2-good exchange economy in which person 1 is endowed with (e11, e12)and person 2 is endowed with (e21, e22)of the goods x1 and X2 Suppose that tastes are homothetic for both individuals. Draw the Edgeworth Box for this economy, indicating on each axis the dimensions of the the box. Suppose that the two individuals have identical tastes. Illustrate the contract curve - i.e. the set of all efficient allocations of the two goods. True or False: Identical tastes in the Edgeworth Box imply that there are no mutually beneficial trades. Now suppose that the two individuals have different (but still homothetic) tastes. True or False: The contract curve will lie to one side of the line that connects the lower left and upper right corners of the Edgeworth Box - i.e. it will never cross this line inside the Edgeworth Box.

Explanation / Answer

c true

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