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Pareto efficient

Pareto efficient

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider the economy studied in class, in which there are two consumption goods: apples (a) and fig leaves (f). Adam's preferences are represented by UA(CA, CA) = 0^log(CA) + (1 – 04)log(C4) and Eve's preferences are represented by UF(C,CF) = 0Flog(C) + (1 – 6#)log(Cf). 1) Assuming that 04 = 0E = 0, draw the contract curve. Justify your answer. 2) Assume that both consumers' types have the same weight 6, labor productivity in apple farms is constant and equal to za, and labor productivity in fig farms is constant and equal to zf. The government has passed a bill taxing the consumption of fig leaves. It plans to redistribute its tax revenues with a lump sum transfer T. This implies that the budget constraint for Adam is now represented by CA + p/(1+7)Cf = wl^ + T and the budget constraint for Eve is represented by C + ps(1+ r)Cf = wlE + T. Is the resulting allocation Pareto efficient? Justify your answer.
Transcribed Image Text:Consider the economy studied in class, in which there are two consumption goods: apples (a) and fig leaves (f). Adam's preferences are represented by UA(CA, CA) = 0^log(CA) + (1 – 04)log(C4) and Eve's preferences are represented by UF(C,CF) = 0Flog(C) + (1 – 6#)log(Cf). 1) Assuming that 04 = 0E = 0, draw the contract curve. Justify your answer. 2) Assume that both consumers' types have the same weight 6, labor productivity in apple farms is constant and equal to za, and labor productivity in fig farms is constant and equal to zf. The government has passed a bill taxing the consumption of fig leaves. It plans to redistribute its tax revenues with a lump sum transfer T. This implies that the budget constraint for Adam is now represented by CA + p/(1+7)Cf = wl^ + T and the budget constraint for Eve is represented by C + ps(1+ r)Cf = wlE + T. Is the resulting allocation Pareto efficient? Justify your answer.
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