Question

1 Pareto and Kaldor-Hicks Efficiency Criterion The graph below shows a utility possibilities frontier for a two-person pure exchange economy where $U_i$ denotes the utility realized by agent $i = \{1,2\}$ at a particular allocation (or endowment/consumption plan). $u_2$ B A C D $u_1$ (a) Explain why all allocations lying on the frontier (i.e., all allocations pertaining to the frontier itself) are feasible and Pareto optimal, whereas all allocations residing within the frontier (such as that pertaining to point A) are feasible but not Pareto optimal. (b) Starting from the allocation corresponding to A, use the above graph to find the area corresponding to those allocations that Pareto dominate allocation A.

          1
Pareto and Kaldor-Hicks Efficiency Criterion
The graph below shows a utility possibilities frontier for a two-person pure exchange economy
where $U_i$ denotes the utility realized by agent $i = \{1,2\}$ at a particular allocation (or
endowment/consumption plan).
$u_2$
B
A
C
D
$u_1$
(a)
Explain why all allocations lying on the frontier (i.e., all allocations pertaining to the
frontier itself) are feasible and Pareto optimal, whereas all allocations residing within the
frontier (such as that pertaining to point A) are feasible but not Pareto optimal.
(b)
Starting from the allocation corresponding to A, use the above graph to find the area
corresponding to those allocations that Pareto dominate allocation A.

1
Pareto and Kaldor-Hicks Efficiency Criterion
The graph below shows a utility possibilities frontier for a two-person pure exchange economy
where Ui denotes the utility realized by agent i = {1,2} at a particular allocation (or
endowment/consumption plan).
u2
B
A
C
D
u1
(a)
Explain why all allocations lying on the frontier (i.e., all allocations pertaining to the
frontier itself) are feasible and Pareto optimal, whereas all allocations residing within the
frontier (such as that pertaining to point A) are feasible but not Pareto optimal.
(b)
Starting from the allocation corresponding to A, use the above graph to find the area
corresponding to those allocations that Pareto dominate allocation A.

Added by Gwendolyn H.

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