CHAPTER 3 Tools of Normative Analysis Copyright ? 2010 by the McGraw-panies, Inc. All rights reserved. McGraw-Hill/Irwin 3-2 Welfare Economics ? Welfare Economics – branch of economic theory concerned with the social desirability of alternative economic states 3-3 Edgeworth Box Adam Eve 0 0’s r Apples per year Fig leaves per year vw u yx 3-4 Indifference curves in Edgeworth Box Adam Eve 0 0’s r Apples per year Fig leaves per year A 1A 2A 3 E 1E 3E 2 3-5 Making Adam better off without Eve ing worse off Adam Eve 0 0’s r Apples per year Fig leaves per year A gA hA p E gghp A Pareto Efficient Allocation 3-6 Making Eve better off without Adam ing worse off Adam Eve 0 0’s r Apples per year Fig leaves per year A g E ggp 1p E p1 A Pareto Efficient Allocation 3-7 Making both Adam and Eve better off Adam Eve 0 0’s r Apples per year Fig leaves per year A g E ggp 1p E p2A p2 p 2? Pareto efficient ? Pareto improvement 3-8 Starting from a different initial point Adam Eve 0 0’s r Apples per year Fig leaves per year A g E ggp 1p E p2A p2 p 2p 3p 4k3-9 The Contract Curve Adam Eve 0 0’s r Apples per year Fig leaves per year A g E ggp 1p E p2A p2 p 2p 3p 4 The contract curve 3-10 Pareto Efficiency in Consumption MRS af = MRS af Adam Eve
