Imagine an economy where there are 3 individuals A, B, C and that there are only
ID: 1139228 • Letter: I
Question
Imagine an economy where there are 3 individuals A, B, C and that there are only 4 feasible situati ons denoted W, X, Y following way: and Z. The individuals rank the situations according to their own well-being in the First best situation for individual Second best situation for individual Third best situation for individual where situations at the same level indicate that the individual is indifferent between those situations (i.e. B likes X, W and Z more that Y, but he is indifferent between X, W and Z) Which of these situations are Pareto efficient? Which are not? Explain whyExplanation / Answer
Pareto efficient means, for a 2 individual case A and B. It is not possible to increase the utility of one person without reducing the other person.
Let's start with the X. Now if instead of X we choose Y, then the satisfaction of A and B will remain the same but the satisfaction of C will go down. So, moving from X to Y is not Pareto efficient. Similarly, moving from X to Z will also be not Pareto efficient. But moving from X to W will be Pareto efficient because satisfaction of A is increasing while the level of satisfaction of C is decreasing.
Y cannot be Pareto efficient because moving from Y to X will be a Pareto improvement, so Y is not the Pareto efficient situation. And we just checked that X is Pareto efficient.
Similarly, Z is also, not the Pareto efficient situation because moving from Z to X will again be a Pareto improvement for A.
In this manner, we can also conclude the W is a Preto efficient point because moving to any point is not increasing the satisfaction level.