The above figure depicts the Edgeworth box for two consumers, Al and B

The above figure depicts the Edgeworth box for two consumers, Al and Bruce. Explain why point “a” cannot be a competitive equilibrium.

What will be an ideal response?

ANSWER

Point “a” cannot be a competitive equilibrium because at point “a”, Al and Bruce each have a different marginal rate of substitution. Since they both face the same prices in a competitive market, at least one of them is not in equilibrium.