CONTRACT CURVE QUIZ by cy3MhAF

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									                                    CONTRACT CURVE QUIZ

                           Name _________________________________
                     The correct blank filler is the first word after the blank line.
In this diagram, points R, S, and T show alternative combinations of traded food and clothing.
As shown here, in the trading process where trade begins at point R and proceeds to point T (or
S), all gains of trade go to the clever clothing producer. This is apparent because after trading
inputs, the less than clever food producer still has the same level of output. This less clever
producer remains on the same isoquant. In moving from point R to point T (or S) we are moving
from an inefficient position to a point on the contract curve, where the final equilibrium is
F
 MRSTlk = CMRSTlk.

        Now, for extra points, you may show what happens when the other trader is the clever
one, so that all the gains of trade go to the other producer. Your assignment is to draw in one
more isoquant so the final equilibrium will show all gains of trade going to the other producer
with the final equilibrium point being to the northeast of T at a point you can label “U”. In this
case, the producer who last time gained nothing from trade will enjoy all the gains of trade.


                 The Edgeworth Box
                                                            O Clothing

                               ..  R
                                                              Producer
                                                              Origin
                               S                 U

                                       .
                                       T

Capital




       0 Food Producer Origin
                                       Labor

								
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