Write down an exchange economy model with two individuals and two goods, in which there is no consumption externality. State and explain the key assumptions of the model. Using the model, answer the following questions: (a) Explain carefully how the concept of Pareto efficiency differs from that of social welfare. (b) State the Second Theorem of Welfare Economics and explain carefully why it holds. What is the importance of the assumption of convex preferences to this theorem?
Write down an exchange economy model with two individuals and two goods, in which there is no consumption externality. State and explain the key assumptions of the model. Using the model, answer the following questions: (a) Explain carefully how the concept of Pareto efficiency differs from that of social welfare. (b) State the Second Theorem of Welfare Economics and explain carefully why it holds. What is the importance of the assumption of convex preferences to this theorem?
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.9P
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1. Write down an exchange economy model with two individuals and two goods, in which
there is no consumption externality. State and explain the key assumptions of the model.
Using the model, answer the following questions:
(a) Explain carefully how the concept of Pareto efficiency differs from that of social
welfare.
(b) State the Second Theorem of Welfare Economics and explain carefully why it holds.
What is the importance of the assumption of convex preferences to this theorem?
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Explain the concept of the utility possibility frontier. What is the role of the utility
possibility frontier in the social welfare maximization problem of a welfarist society?
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