Re: ISI INTERVIEW PREP

Posted by Hargun on Jul 04, 2012; 6:48pm
URL: http://discussion-forum.276.s1.nabble.com/ISI-INTERVIEW-PREP-tp7578819p7579046.html

@neha: I don't think that in the case where preferences are of min type, but the total amounts of two goods are different, we can say that every pareto-efficient point can be reached competitively. because if we draw say a slanted line of 45 degrees through the endowment point passing through the contract region(parellelogram), then the ICs highest tangent to the price line will not be tangent to each other, thus there will be no equilibrium for these prices. but where one of these goods is free, the price line is horizontal or vertical.
it cannot be horizontal because the parellelogram is such that, the horizontal price line with px=0 cannot be bargained for (try and start from equal prices and think that prices are bargained progressively making the price line steeper or flatter. if you make it flatter, you will reach a point where price line intersects the point (0,1). this isnt an equilibrium price ratio and there is no reason to reduce price of x further) i think the only option left is a vertical price line, which means option b is correct.
I'm sure of the first para i wrote but not about the explanation given in the second para. what do you think?