What is the endowment point in Edgeworth box?

Any point in the Edgeworth Box can conceivably be an initial endowment: ◦the quantity of each good each consumer has before trade. When the consumers are allowed to trade, it is possible that both will attain a higher level of utility than when they are not allowed to trade.

How do you read an Edgeworth box?

Edgeworth diagram is divided into two types. The horizontal side of the box measures a fixed total output of good 1 and the vertical side measures a fixed total output of good 2. Individual 1’s consumption of good 1 is measured horizontally from the origin at o1. His/ her consumption of good 2 is vertical from o1.

What is an endowment point?

Each point on a given curve, known as an indifference curve, represents equal levels of satisfaction from different combinations of consumption in the present and future. The position of an indifference curve (above or below point ‘ω’ — the endowment point) depends on the individual’s own rate of time preference ‘ρ’.

What does the contract curve indicate in Edgeworth box diagram?

In an Edgeworth box the contract curve is the set of tangency points between the indifference curves of the two consumers. It is termed the contract curve since the outcome of negotiation about trade between two consumers should result in an agreement (a ‘contract’) that has an outcome on the contract curve.

What are initial endowments?

An initial endowment ‘ω’ represents the amount of commodities X & Y individuals A & B have available before trade. Thus (XA ,YA ) = wA and (XB , YB ) = wB where wA and wB represents A’s and B’s initial endowments (or income).

What does it indicate when indifference curves intersect in an Edgeworth box?

When indifference curves are smooth and convex, if two indifference curves are tangent at a point in an Edgeworth box, then that point: represents the competitive equilibrium.

Can a contract curve be a straight line?

The contract curve is a straight diagonal line connecting A’s origin to B’s origin (note that this is unlike the curved “sketch” drawn in part B. We have a linear contract curve, but this is not always the case).

How does trade take place in Edgeworth box?

Edgeworth boxes are a useful tool when considering the trade of two finite resources between two distinct economies. Utility in both economies can be shown to increase as trade allows the economies to achieve more efficient and equitable allocations of the resources than is possible in a state of autarky.

How do you tell if an endowment is Pareto efficient?

We can find the Pareto-efficient points by fixing Person 1’s utility and then asking what point, on the indifference isoquant of Person 1, maximizes Person 2’s utility. At that point, any increase in Person 2’s utility must come at the expense of Person 1, and vice versa; that is, the point is Pareto efficient.

What does the Edgeworth box tell us?

Figure 1, the Edgeworth Box The lower left-hand corner represents the origin for consumer’A’ and the upper right-hand corner represents the origin for consumer’B’. Person A’s preferences (indifference curves) are convex to the origin OA.

What is an example of the initial endowment point?

If, for example, the two consumers are at the initial endowment point ‘w’, it is possible to make person ‘B’ better off by moving to point ‘R’ without making person ‘A’ worse off (a movement along person A’s indifference curve).

What is the difference between Pareto efficiency and Edgeworth box?

A point in the Edgeworth box is the consumption of one individual, with the balance of the endowment going to the other. Pareto efficiency is an allocation in which making one person better off requires making someone else worse off—there are no gains from trade or reallocation.

How do you find equilibrium in Edgeworth box?

Fig. 3. Equilibrium in an Edgeworth box The equilibrium corresponding to a given endowment ω is determined by the pair of indifference curves which have a common tangent such that this tangent passes through ω. We will use the term ‘price line’ to denote a common tangent to two indifference curves.