Economics 172

Homework 6 Chapter 6 Due March 14

Review Questions

6.1, 6.4, 6.6, 6.17, 6.19

6.1 The dimensions of the Edgeworth Box signify the total amount of the two goods available to the two consumers. Because the maximum number of good X on the X axis represents the total amount, the allocation of good X between person A and B is shown by any point in the EB. If we are at one of the EB corners, it means one person has all of one good and the other has all of the other. Alternatively, it means one person has all of both goods and the other has none of either.

6.4 Efficiency and inefficiency in the context of distribution: Efficiency means that if the two goods are reallocated between the 2 consumers, one person cannot be made better off without another being made worse off. An inefficient distribution of goods occurs when one person can be made better off without making the other worse off. If the distribution is within the EB, so long as the marginal rates of substitution of the two consumers are different, the two goods can be reallocated to make at least one better off without making the other worse off. Any distribution within the EB has to be on a different indifference curve of each consumer. The slope of the indifference curve at that point is the consumer’s MRS of one good for the other. If the slopes are different, then MRS is different and mutually beneficial trade can occur.

6.6 John: 40 gallons of gas and 20 bags of sugar. MRS = 5G/1S

Maria 40 gallons of gas and 50 bags of sugar. MRS = 1G/1S

Total gas = 80 gallons. Total sugar = 70 bags

If john exchanges 9 gallons of gas for 3 of Maria’s bags of sugar, both MRS are 3G/1S.

They are both better off since their MRS are equal.

6.17 Landing fees at airports are based on weight. But the true cost of taking off or landing is based on the use of the scarce resource, which is the ability of another plane to take off or land. If 20 5 passenger planes take 1 hour to land, and one plane with 400 people has to wait 1 hour because of the backup that the 20 small planes cause, then there is a very high cost of landing. Landing rights in this case are probably allocated on a first come first served basis.

This is not efficient because if we reallocated landing rights and let the large plane land, the passengers would be better off. They could give the passengers on the smaller planes financial compensation so they would also be better off. So if landing fees were changed to reflect the ability to land at a certain time, the small planes would face higher fees and the larger plane lower fees. That would discourage some smaller planes from landing and free up space for the big plane to land.

Remember, efficiency doesn’t necessarily have to actually compensate, you only have to be able to potentially compensate.

6.19 False. Economics argues that for efficiency reasons we should be on the contract curve. This is an example of positive economics. Noneconomic equity reasons focus on where on a contract curve we should be vis-a-vis the distribution of goods across consumers. This is positive economics.