Question
Consider an exchange economy with two agents, 1 and 2,
and two goods, X and Y. Each agent's consumption set is in +R2. The endowments of agents 1 and 2 are (10, 1) and (0, 9) respectively. In any commodity bundle, the first entry is the quantity of X, and the second entry is the quantity of Y. If a>c, or a=c and b>d, then Agent 1 strictly prefers bundle (a,b) to (c,d). If b>d, or b=d and a>c, then Agent 2 strictly prefers bundle (a,b) to (c,d). Which of the following allocations is an efficient allocation?Solution
The allocation where Agent 1 gets (10,1) and Agent 2 gets (0,9) is an efficient allocation because it respects their initial endowments and preferences, and any change would make at least one agent worse off.
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