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Microeconomics 2nd Edition by Douglas Bernheim
Edition 2ISBN: 978-0071287616Microeconomics 2nd Edition by Douglas Bernheim
Edition 2ISBN: 978-0071287616 Exercise 6
Figure 16.17 (page 572) shows why, in an economy with a single consumer, output efficiency requires the marginal rates of substitution and transformation to be identical. Explain why the same condition must hold in an economy with many consumers, using a graph (or graphs) to illustrate your explanation.
Figure 16.17 Output Efficiency. Point A doesn't achieve output efficiency, because Humphrey's indifference curve crosses the PPF at that point. Since the two curves lie tangent to different straight lines at that point, Humphrey's MRS for food with housing doesn't equal the MRT. Point C achieves output efficiency because the indifference curve touches but does not cross the PPF at that point. At point C, Humphrey's indifference curve and the PPF lie tangent to the same straight line, implying that Humphrey's MRS for food with housing equals the MRT.
Figure 16.17 Output Efficiency. Point A doesn't achieve output efficiency, because Humphrey's indifference curve crosses the PPF at that point. Since the two curves lie tangent to different straight lines at that point, Humphrey's MRS for food with housing doesn't equal the MRT. Point C achieves output efficiency because the indifference curve touches but does not cross the PPF at that point. At point C, Humphrey's indifference curve and the PPF lie tangent to the same straight line, implying that Humphrey's MRS for food with housing equals the MRT.
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Microeconomics 2nd Edition by Douglas Bernheim
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