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Querying microeconomics

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  1. Introduction
  2. What is a Pareto optimum as a link to a price or the price ratio?
  3. How to find the equation of the contract curve?
  4. How to find the equation of the 'utility possibilities curve?
  5. What's new compared to a firm in perfect competition?
  6. How to calculate the cooperative equilibrium?
  7. Conclusion

What is the relationship between Pareto Optimum and Competitive Balance?

Very briefly, the relationship between Pareto optimality and competitive equilibrium is an implication relation: z is a competitive equilibrium => z is Pareto optimal (note that the relation of implication does not apply in both directions).

This result is easy to show, since the condition for a Pareto optimum is only the tangency between the indifference curves of the two individuals (that is to say TMSA = TMSB), while a competitive equilibrium requires in addition, for each individual TMS is equal to the ratio of prices (ie, it must TMSA = TME = TMSB).

The contract curve is the set of points Pareto-optimal (in an Edgeworth box). Two things must be verified to Pareto-optimal point: first, this should be feasible (=> for each property, the sum of the amounts held by each individual = quantity of the good available in the economy). Secondo, the indifference curves of the two individuals must be tangent (=> their TMS must be equal). All this gives several equations that must be satisfied simultaneously for a Pareto-optimal point. The equation of the contract curve is the 'solution' to this system of equations.

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