Edgeworth Box

1
Edgeworth Box
Suppose we look at the production possibilities
for good X
Then this may represent an isoquant for good X
(e.g. combinations of capital and labour
producing 1 X)
CapitalX KX
Similarly, this may be another isoquant for good
X (e.g. producing 1.5 X)
0
LaborX LX
2
Edgeworth Box
CapitalY KY
For example, the isoquants Y2 and Y3 in this
figure.
Y3
Y2
0
LabourY LY
3
Edgeworth Box
Combining these two possibilities the figure on
the left represents isoquants for good X and the
figure on the right isoquants for good Y
4
Edgeworth Box
We can combine the information of these two
figures into one figure
5
Edgeworth Box
We can combine the information of these two
figures into one figure
6
Edgeworth Box
We can combine the information of these two
figures into one figure
7
Edgeworth Box
We can combine the information of these two
figures into one figure
8
Edgeworth Box
We can combine the information of these two
figures into one figure
9
Edgeworth Box
The origin of good Y is in the north-east corner
The origin of good X is in the south-west corner
Ly and Ky are measured relative to the Oy corner
Lx and Kx are measured relative to the Ox corner
10
Edgeworth Box
Kx
Ly
Oy
We let K be the available capital and L the
available labor
A
Point A is not an efficient allocation of K and L
for the production of X and Y
Ky
Lx
Ox
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Edgeworth Box
Moving K from X to Y and L from Y to X
Can increase the production of X without lowering
the prod. of Y
Kx
Ly
Oy
K
The combination of all efficient input
allocations is called the
A
contract curve
Ky
Lx
Ox
L
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Edgeworth Box
To test whether you understand the Edgeworth Box
and the properties of CRS try to derive the
special circumstances under which the ppf is a
straight line (there are two distinct special
cases).
concave
Connect them with the red straight line, then the
value of the ppf must be everywhere above this
red straight line
As a consequence the production possibility set
is that is all points in between
2 arbitrary points that can be produced can also
be produced
convex,