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1) What is Pareto Efficiency?

Pareto Efficiency refers to a situation where no improvement to welfare can be made without
making somebody else worse off. If the allocation is not P.E then it is deemed wasteful in the
sense that it is possible to make someone better off without hurting anyone else.

2) What is the contract curve?


It is a curve that has all the points of Pareto Efficiency

3) How is Pareto Efficiency mathematically proven?


Pareto Efficiency occurs when the MRS of one person is equal to the other.

4) Why is the PPC curve associated with the Edgeworth Box diagram?
The analysis on the Edgeworth box is under the assumption that commodities are all fixed. So the
PPC is brought in to show what happens when the productive inputs can shift between the
productions of 2 goods in the economy.

5) What is the difference between MRS and MRT


Marginal Rate of Substitution (MRS) Marginal Rate of Transformation (MRT)
- The rate at which an individual is willing to -the rate at which one good must be
trade on good for an additional amount of sacrificed in order to produce a single extra
another (consumer perspective) unit (or marginal unit) of another good,
- The absolute value of the slope of an assuming that both goods require the same
Indifference curve scarce inputs (producer perspective)
-the absolute value of the slope of the ppc

6) How is Pareto Efficiency, Indifference Curves and PPC relate to each other?
When the supplies of the goods are variable (not fixed), the condition for Pareto efficiency is
satisfied when MRT=MRS(adam)=MRS(eve)

7) What Is the First Fundamental Theorem of Welfare Economics


1st Fundaments: Competitive Markets are Pareto efficient; under the assumption:
Markets exists for all goods and services
All markets are competitive

Because of this first theorem, a competitive economy automatically allocates resources


efficiently, without any need for centralized direction (invisible hand)

8) What is the Second Fundamental Theorem of Economics?


2nd Fundaments: Society can attain any Pareto efficient allocation of resources by making a
suitable assignment of initial endowments and then letting people freely trade with each other,
as in our Edgeworth Box model.
9) What is the Utility Possibility Curve?
The UPC is derived from the Contract Curve and it shows the maximum amount of one persons
utility given the other individuals utility level.

10) What is a social welfare function?


A function that embodies societys views on the relative deservedness. A social welfare function
is simply a statement of how the well-being of societys members translates into the well-being
of society as a whole. Sometimes even though the markets are efficient it may not be fair or
equitable. Hence, with the social welfare function, focuses on scope and views of what is
important to society. We conclude that, even if the economy generates a Pareto Efficient
allocation of resources, government intervention may be necessary to achieve a fair
distribution of utility.

Utilitarian Rawlsian Weighted


Definition Sums the utility Welfare is maximized when
of each the utility of those society
individual in members that have the least
order to obtain is the greatest. No economic
society's overall activity will increase social
welfare welfare unless it improves
the position of the society
member that is the worst off.
Strengths
Weakness