Topic 05 Exchange and comparative advantage

Question 1

bilateral trade

Answer 1

only those 2 goods are exchanged and two agents endowed with the goods

Question 2

autarky

Answer 2

self-sufficiency, using what you have, can’t do better than consuming what has been given to them

Question 3

edgeworth box

Answer 3

shows all possible outcomes of exchange, shows total endowment (total of both agents goods)

Question 4

pareto improving exchange

Answer 4

shows outcomes where agents are better of exchanging. when MRSa=MRSb, the allocation is pareto efficient

Question 5

MU

Answer 5

differentiate utility equation for the good eg in terms of x

Question 6

MRS

Answer 6

MU of X/ MU of Y

Question 7

contract curve

Answer 7

all pareto efficient allocations

Question 8

the core

Answer 8

part of the contract curve that is better than the initial endowment for both parties see figure 5.3

Question 9

solution to an envy free and pareto efficient allocation

Answer 9

equality of opportunities (same initial start point by redistributing initial endowment)
liberalism allow choices to be made according to different preferences allows for utility to be higher etc as they have access to same exchange rates, pareto efficiency
difficult to put into practice

Question 10

slope of PPF

Answer 10

MRT (marginal rate of transformation)
how one good can ‘transform’ into another

Question 11

pareto improving exchange

Answer 11

exhausting trade opportunities to increase total production
figure 5.6 has a joint PPF