Re: can someone please post solutions to pareto optimal questions of dse 2014?

Posted by onionknight on Jun 01, 2015; 11:47am
URL: http://discussion-forum.276.s1.nabble.com/can-someone-please-post-solutions-to-pareto-optimal-questions-of-dse-2014-tp7597203p7597297.html

Thank you for pointing that out. It's indeed the line ya=yb=1/2 where the indifference curves change shape but the answer and the approach still remain the same. When you're assessing pareto optimality, you don't have to restrict yourself to switching between the allocations given in the question or as you are doing, moving to the pareto optimal point. You can move anywhere within the edgeworth box and if any movement results in an increase in the utility of at least one consumer and this increase is not at the expense of the utility of the other, then it is a pareto improvement.

Take the third allocation for instance, xa=1/4, xb=3/4, ya=1, yb=0 -> ua=1/2 ub=3/4. Now consider the allocation xa=1/2,xb=1/2,ya=0,yb=1->ua=1/2 ub=1. Clearly, this is a pareto improvement and thus we can rule out option c. You can rule out options a and b in similar fashion but not option d because no pareto improvements exist.