What is the best outcome for the society

Reference no: EM132196967

Question: Assume that in a two person (person 1 and person 2), two good (X and Y) world, both people have identical preferences. If this is the case, then the contract curve will be a straight line connecting the two origins.

1) Draw a well-labelled diagram illustrating this contract curve in an Edgeworth Box. Be sure to illustrate at least one indifference curve for each person. Assume that individuals' preferences are such that their indifference curves display diminishing MRS (i.e. that indifference curves are convex to the origin).

2) What does the associated utility possibility frontier (UPF) look like? Illustrate this UPF on a well-labelled diagram.

3) Assume Society A has a social welfare function that weights each individual's well-being (utility) equally, ie WA = U1 + U2

Draw an indifference curve for this social welfare on your diagram (i.e. the diagram you just drew with the UPF). Use a dashed line to indicate this indifference curve. How would society A rank the points along the UPF in this diagram? Where are these points on your Edgeworth Box diagram?

4) Society B places more weight on the happiness (utility) of person 1, so that

WB = 2U1 + U2

How would this society rank the points along your utility possibility frontier? What is the best outcome? What is the worst outcome? Where are these points in the Edgeworth Box diagram?

5) Society C values equity above all things, so that

WC = min[U1, U2]

These societal preferences map out a set of L-shaped social indifference curves. What is the best outcome for this society? What is the worst outcome? Where are these points in the Edgeworth Box diagram?

Reference no: EM132196967

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