Answer to Question #65015 in Economics for Mike Corwallace

Question

Assume that we are dealing with an economy with two persons and two goods, beer and sausage.
Use an Edgeworth box to give an example of preference schedules (i.e. indifference curves) for a
case in which
 the initial allocation is such that person 1 owns all beer and person 2 owns all sausages, and
 this initial allocation is Pareto optimal.

Answer 1

The Edgeworth box is used frequently in general equilibrium theory. It can aid in representing the competitive equilibrium of a simple system or a range of such outcomes that satisfy economic efficiency.[1]
1) at the initial allocation, for which person 1 owns all beer and person 2 owns all sausages, the point of outcome will be in the top left or in the bottom right vertex of the box, which will be not efficient.
2) the allocation that is Pareto optimal lies on the indifference curve, which passes the bottom left vertex, the central point and the top right vertex of the box.
References:
1. https://en.wikipedia.org/wiki/Edgeworth_box