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March 29, 2017

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IS this true or False

In a competitive pure exchange economy with two consumers and two goods, if one consumer has perfect complement preferences and the other has perfect substitutes then the contract curve is along the outer edge of the Edgeworth Box.

  • MICRO ECON - ,

    I think false. Draw the indifferece curves for each person. For the perfect complements case, the guy must have both goods in equal quantities. Assuming a 1-for-1 complement, he will consume along a 45-degree line, and each indifference curve looks like a corner of a box, the point of the corner lying on the 45 degree line. (If its say, a 2-for-1 compliment, the guy will consume along a 30-degree line)
    The perfect substitute guy has indifference curves that are straight. So, There will be an interior tangent.

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