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      Question

      In the Edgeworth production box, the locus of tangency

      points between isoquants of two industries defines the production contract curve. Which of the following statements about the Second Theorem of Welfare Economics in this context is CORRECT?
      A Any point on the production contract curve can be achieved as a competitive equilibrium through lump-sum redistribution of initial factor endowments, without distorting production efficiency Correct Answer Incorrect Answer
      B The Second Theorem applies only when externalities are absent and the contract curve coincides with the diagonal of the Edgeworth box Correct Answer Incorrect Answer
      C Any point on the contract curve is achievable only through tax-subsidy schemes that necessarily distort factor prices Correct Answer Incorrect Answer
      D The Second Theorem guarantees that the competitive equilibrium point on the production contract curve is also Pareto-optimal in consumption Correct Answer Incorrect Answer

      Solution

      The Second Theorem of Welfare Economics states: Any Pareto-efficient allocation (any point on the contract curve) can be decentralised as a competitive equilibrium, provided initial factor endowments are appropriately redistributed via lump-sum transfers. Lump-sum redistribution reallocates factor endowments without distorting price signals, preserves MRTS = factor price ratio, and can achieve any desired point on the production contract curve. Options (B) and (C) impose conditions the theorem does not require. Option (D) conflates productive efficiency with consumption efficiency.

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