In a two-person two-good exchange economy, agents are A and B and goods are 1 and 2, with utilities and . There are 5 units of each good (, ). Consider the allocation in which A gets 4 units of good 1 only, and B gets 1 unit of good 1 and 5 units of good 2.
The above allocation is:
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In a two-person two-good exchange economy, agents are A and B and goods are 1 and 2, with utilities u_A(x₁,x₂)=α x₁+x₂ and u_B(y₁,y₂)=y₁y₂. There are 5 units of each good (x₁+y₁=5, x₂+y₂=5). Consider the allocation in which A gets 4 units of good 1 only, and B gets 1 unit of good 1 and 5 units of good 2. The above allocation is: (A) always Pareto optimal (B) never Pareto optimal (C) Pareto optimal if α≤ 5 (D) Pareto optimal if α≥ 5
Also written as: In a two-person two-good exchange economy, agents are A and B and goods are 1 and 2, with utilities u_A(x_1,x_2)=alpha x_1+x_2 and u_B(y_1,y_2)=y_1y_2. There are 5 units of each good (x_1+y_1=5, x_2+y_2=5). Consider the allocation in which A gets 4 units of good 1 only, and B gets 1 unit of good 1 and 5 units of good 2. The above allocation is:
Welfare economics and social choice has come up 62 times in 6 exams since 2004.
This question is on Pareto efficiency and Pareto improvements, part of Welfare economics and social choice in Microeconomics.
What it means for an allocation to be efficient, checked in exchange economies and other settings.
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Question from the DSE 2013 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.