Answered: Write down an exchange economy model…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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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