ECON 203 Chapter Notes - Chapter 7-12: Isocost, Pareto Efficiency, Budget Constraint
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Pareto optimality in consumption: requires nonwastefulness of goods - xa+xb = x and ya+yb = y and muxa(xa,ya) / muya(xa,ya) = muxb(xb,yb) / muyb(xb,yb) No reason for consumers to deviate from what they want to buy. They want to minimize cost but they cannot arbitrarily choose which budget constraint to have, you cant choose m. Pareto optimality in production: requires nonwastefulness of inputs lx+ly = l and kx+ky = k. This symbolizes that both firms minimize costs to produce x and y respectively. No incentive for firms or producers to deviate from what they are producing/buying currently. Firms can choose which isocost line applies to them. They choose which line maximizes profit, they can choose c. Pareto optimality in general: you need all of the following equations in order to get to the last one (pareto optimality in general) xa+xb = x and ya+yb = y. Muxa(xa,ya) / muya(xa,ya) = muxb(xb,yb) / muyb(xb,yb) lx+ly = l and kx+ky = k.
