Marvin's utility function is U_m(x₁,x₂)= x₁_m+ 2x₂_m, where x₁_mand x₂_mare quantities of goods x₁ and x₂he chooses. Similarly, Shelly's utility function is U_s(x₁,x₂)= 2x₁_s+ x₂_s. In total they have 10 units of x₁and 10 units of x₂. In an Edgeworth Box Diagram, where Marvin's origin is at the lower left and Shelly's is at the upper right, and where quantities of x₁are measured on the horizontal axis and x₂on the vertical axis, the contract curve is: A)the sides of the box which intersect at the northwest corner. B)the diagonal of the box from Marvin's origin to Shelly's origin. C)the sides of the box which intersect at the southeast corner. D)the line tying the origin with the endowment point.

Question

Quizplus · Accepted Answer

The contract curve is the set of all Pareto efficient allocations. A Pareto efficient allocation is one where it is impossible to make one person better off without making someone else worse off. In this case, the contract curve is the set of all allocations that lie on the diagonal of the Edgeworth box. This is because any allocation that lies off the diagonal can be improved upon by moving to an allocation on the diagonal that gives both Marvin and Shelly more utility.

Marvin's Utility Function Is Um(x1,x2)= X1m + 2x2m, Where X1m

Marvin's Utility Function Is U_m(x₁,x₂)= X₁_m+ 2x₂_m, Where X₁_m