Material Detail

Micro theory :: contract curves :: perfect substitutes and perfect substitutes

Micro theory :: contract curves :: perfect substitutes and perfect substitutes

By means of four spin buttons, the user fixes the coefficients for the indifference curves for the perfect substitutes and the endowments of two goods. The accompanying graph automatically updates, showing the contract curve between the two traders. Click the image above left to see the interface.
Rate

Quality

  • User Rating
  • Comments  (2) Comments
  • Learning Exercises
  • Bookmark Collections
  • Course ePortfolios
  • Accessibility Info

More about this material

Comments

Log in to participate in the discussions or sign up if you are not already a MERLOT member.
Praveen Varghese
Praveen Varghese (Student)
2 years ago
How do I solve and find out the walrasian equilibrium in the above case! Is it possible at all!
Thomas Mitchell
Thomas Mitchell (Faculty)
2 years ago

Your second question is on the mark.

How do we solve for a Walrasian equilibrium? We equate the traders' MRSs, or at least we try to do so.

If the traders' constant MRSs are different, then they will never be equated and we're forced to a corner solution; the Walrasian equilibrium will be a range of allocations on the contract curve, which is on the boundary of the Edgeworth box.

If the traders' constant MRSs are [already] the same, then every point in the box is Pareto efficient and every point on their coincident initial indifference curves is a Walrasian equilibrium.