In the Edgeworth box diagram, if the initial allocation of consumer goods is off the contract curve, then we can be sure that
A)both parties can be made better off.
B)trade will occur if allowed and transactions costs are high.
C)the initial allocation is unfair.
D)the MRS of each consumer is the same.

Question

Quizplus · Accepted Answer

If the initial allocation of consumer goods is off the contract curve, it means that it is not Pareto efficient and there exists a way to make at least one consumer better off without making the other worse off. Hence, answer A is correct. Answer B may or may not be true depending on the specific circumstances, as high transaction costs may prevent trade even if it is mutually beneficial. Answer C is subjective and cannot be determined solely based on the initial allocation being off the contract curve. Answer D is not necessarily true, as the MRS of each consumer depends on their individual preferences and endowments.

In the Edgeworth Box Diagram, If the Initial Allocation of Consumer