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Marketing - The Competitive Equilibrium in an Exchange Economy and Its Representation Using an Edgeworth Box - Essay Example


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Marketing - The Competitive Equilibrium in an Exchange Economy and Its Representation Using an Edgeworth Box

126) The figure above indicates the consumption possibilities, the indifference curves and the budget constraints for the two consumers; Aisha and Robin. Let F represent food and C represent clothing; A=Aisha and R= Robin Therefore FA + FR= F and CA+CR= C The utility of Aisha, UA= FA + CA = B on the indifference curve The utility of Robin, UR= FR + CR = A on the indifference curve 1 A) Based on the figure above, points A and B indicates the pareto optimality points. These are the points at which the consumers will attain an efficient utility of the goods in the economy. At point A, Robin will be consuming the maximum he could for both the food and clothing. This is the point indicating how much he is ready and willing to lose for an equal amount from Aisha. In addition, at point A, Aisha is at optimal utility consuming a paltry UA= FA + CA while Robin has UR= FR + CR; this point indicates that Aisha though utilizing more of food than Robin she is satisfied as Robin utilize more clothes at this point than her. At point B, both consumers are efficiently utilizing the available goods. Robin is at, UR= FR + CR while Aisha is at UA= FA + CA. This point indicates that Robin is consuming more food than Aisha. To obtain an optimum exchange, Aisha utilizes more clothes than Robin. More over, points A and B lie on the indifference curves that measure the marginal rate of substitution of a given good for another by the consumers; UA and UR. Points A and B indicate the rates at which both Robin and

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Aisha are willing to substitute either good and still remain on the same indifference curve (Mackintosh & Andrew Pg. 126). B) Neither point A nor point B is on the contract curve. This is because, points A and B indicates the pareto optimality of both consumers. They indicate the levels at which Aisha and Robin are efficiently utilizing food and clothes. Under point A and B, all the consumers are well off and none is better than the other. In the exchange box, a contract curve indicates all the emerging points that are not under pareto optimality. The points on the contract curve shows that the utility of one consumer can be increased only by decreasing the utility of the other consumer. Remarkably, contract curve shows all the pareto efficient points. Further more the indifference curves of both the consumers at tangential to each other. This is as indicated at point T where curve UA is tangential to curve UR. At this point, the marginal rate of substitution for both food and clothes is the same for Robin and Aisha (Mackintosh & Andrew pg.126) That is MRSAF, C = MRSRF, C C) Food has more demand than clothes. This is indicated in the above figure with both consumers have high initial amounts of food This is as shown at point P for Robin and point X for Aisha. From the indifference maps, it is indicative that, both Aisha and Robin have tried to maintain large amounts of food than clothing. Notably, the consumers’ marginal rate of substitution of food for clothes is low. More over, the indicated reductions in the amounts of food for both consumers are


Title: Competitive equilibrium in an exchange economy and its representation using an Edgeworth Box Name: Course: Institution: In an exchange economy, it is every consumer’s goal to be at a competitive advantage than all other consumers. In the endevor to attain pareto optimality in consumption, several assumptions have been fronted in the analysis of attaining the desired efficiency…
Author : nkoepp
Marketing - The Competitive Equilibrium in an Exchange Economy and Its Representation Using an Edgeworth Box essay example
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