(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 629

604 PART 4 • Information, Market Failure, and the Role of Government

Karen’s Food
4F
3F

10F

OK

6C

Karen’s
Clothing

James’s
Clothing
B

2C

4C

+1C
1C
–1F

5C

A

6C

OJ

6F

7F

10F

James’s Food

F IGURE 16.4

EXCHANGE IN AN EDGEWORTH BOX
Each point in the Edgeworth box simultaneously represents James’s and Karen’s market baskets of food and clothing. At A, for example, James has 7 units of food and 1
unit of clothing, and Karen 3 units of food and 5 units of clothing.

5C for Karen. Karen’s allocation of food (3F) is read from right to left at the top
of the box diagram beginning at OK; we read her allocation of clothing (5C) from
top to bottom at the right of the box diagram.
We can also see the effect of trade between Karen and James. James gives up
1F in exchange for 1C, moving from A to B. Karen gives up 1C and obtains 1F,
also moving from A to B. Point B thus represents the market baskets of both
James and Karen after the mutually beneficial trade.

Efficient Allocations
A trade from A to B thus made both Karen and James better off. But is B an
efficient allocation? The answer depends on whether James’s and Karen’s MRSs
are the same at B, which depends in turn on the shape of their indifference

curves. Figure 16.5 shows several indifference curves for both James and Karen.
Because his allocations are measured from the origin OJ, James’s indifference
curves are drawn in the usual way. But for Karen, we have rotated the indifference curves 180 degrees, so that the origin is at the upper right-hand corner of
the box. Karen’s indifference curves are convex, just like James’s; we simply see
them from a different perspective.
Now that we are familiar with the two sets of indifference curves, let’s examine the curves labeled U 1J and U 1K that pass through the initial allocation at A.
Both James’s and Karen’s MRSs give the slope of their indifference curves at A.
James’s MRS of clothing for food is equal to 1/2, while Karen’s is 3. The shaded
area between these two indifference curves represents all possible allocations of