Perfect Substitutes

[Devika]

This seems to be a last minute, asinine doubt. Please help.

If in an exchange economy, the two consumers have the utility function of the type- Xi + Yi, i =1,2
then all the allocations in the box are pareto optimal. What about the case when the have different MRS.
The contract curve is usually the x axis for consumer 1 and y axis for consumer 2. Does this hold for both the cases - MRS 1 < MRS 2, and MRS 1>MRS2 ?

Also can some one tell how to find the competitive equilibrium in case of two perfect substitutes. Thanks :)

[duck]

Hi Devika.. :)

Suppose, U1= 2(x1)+y1 and U2 = x2+y2.
Then, set of pareto optimal allocations will be x axis of Agent1 nd y-axis of Agent2.

Suppose, U1=x1+y1 and U2 =2(x2)+y2
Then, set of preto optiomal allocations will be x-axis of Agent2 and y-axis of Agent1.

Dont' try to memorise according to which MRS is greater.
Always try to plot the edgeworth and check.