Given an initial allocation of resources that is off the consumption contract curve, in a perfect market environment without externalities and imperfect information,
A)One can end up at any point on the contract curve
B)One can end up at only one spot on the contract curve
C)Both indifference curves could move to a higher level of utility
D)Only one of the indifference curves could move to a higher level of utility

Question

Quizplus · Accepted Answer

In a perfect market environment without externalities and imperfect information, if the initial allocation of resources is off the consumption contract curve, then it means that the allocation is not efficient. However, through market exchange, the parties can reach a Pareto-efficient allocation on the consumption contract curve, where both parties are made better off. In the process, it is possible for both indifference curves to move to a higher level of utility, as they find a mutually beneficial exchange. Therefore, the correct choice is C.

Given an Initial Allocation of Resources That Is Off the Consumption