If each of the two players represented in an Edgeworth box has Cobb-Douglas indifference curves, then the contract curve will be:
A)The vertical axis.
B)the diagonal line that begins at the opposite corners of the two players' origins and divides the box into two equal triangles.
C)the series of tangency points where the two players' indifference curves have but one point in common.
D)the horizontal axis.

Question

Quizplus · Accepted Answer

When both players have Cobb-Douglas indifference curves, the contract curve is the series of tangency points where the two players' indifference curves have but one point in common. This is because Cobb-Douglas utility functions satisfy the property of constant elasticity of substitution, which means that the ratio between the marginal utilities of the two goods remains constant along the indifference curve. Thus, the tangency point of the two indifference curves represents the allocation where the ratio of marginal utilities is the same for both players, which is the efficient outcome. The contract curve is the series of tangency points where the two players' indifference curves have only one point in common. This is because at these points, both players are indifferent between the allocation of goods and neither can be made better off without making the other worse off. The other options are not correct as they do not accurately represent the contract curve in a situation where both players have Cobb-Douglas indifference curves.

If Each of the Two Players Represented in an Edgeworth