In the Edgeworth box, the contract curve must:
A)be concave.
B)pass through the endowment point.
C)be a straight line.
D)pass through the points where the two indifference curves are tangent to each other.

Question

Quizplus · Accepted Answer

The contract curve in the Edgeworth box represents the set of Pareto efficient allocations that can be reached through trade between the two individuals. These allocations must satisfy the condition that the two individuals are at their respective tangency points on their indifference curves, which means they both derive equal marginal utility per dollar spent on each good. Therefore, the only point at which the two individuals can agree to trade is at the point where their indifference curves are tangent, and this is where the contract curve intersects. Therefore, answer D is correct. The other options (A, B, and C) are incorrect because the contract curve can be convex, need not pass through the endowment point, and need not be a straight line.

In the Edgeworth Box, the Contract Curve Must