AGEC 21700 Lecture Notes - Lecture 3: Pareto Efficiency

• School: Purdue University
• Department: Agricultural Economics
• Course: AGEC 21700
• Professor: Weinstein Michael

Document Summary

Marginal rate of substitution: the negative of the slope of an indifference curves: equal in magnitude, indifference curve slope = dx2/dx1 u=constant, mrs (x2 for x1) = - dx2/dx1 u=constant. The rate at which a household is willing to substitute commodity x2 for x1. Pareto efficient allocation: there is no way in which we can reallocate commodities to another to improve without making another agent worse off. Consider a two commodity ad two household economy. 2 because we can graph it on a two dimensional plane.