Suppose that Thelma and Lou’s child Ted takes 2 pizzas from Lou and gives them to Thelma, and then takes 2 sodas from Thelma and gives them to Lou. Does such a reallocation represent a Pareto improvement?
]]> U_{L}. Thelma starts with 3 sodas and one pizza; after the reallocation she has 3 pizzas and one soda. Note that both of those bundles of pizza and soda lie on the same indifference curve, *U*_{T}. Because neither Lou nor Thelma has changed indifference curves, neither is any happier, which implies that the reallocation is not a Pareto improvement. For further review see section “Efficiency in Markets: Exchange Efficiency”.
]]>U_{L}, and Thelma never leaves indifference curve *U*_{T}. Because neither Lou nor Thelma has changed indifference curves, neither is any happier; the reallocation cannot be a Pareto improvement. For further review see section “Efficiency in Markets: Exchange Efficiency”.
]]> Suppose that Thelma and Lou’s child Ted takes 1 pizza from Lou and gives it to Thelma, and then takes 1 soda from Thelma and gives it to Lou. Does such a reallocation represent a Pareto improvement?
]]>U_{L}, so the reallocation makes Lou happier. The reallocation also leaves Thelma with two pizzas and two sodas. That bundle is farther from Thelma’s origin than her initial indifference curve, *U*_{T}, so the reallocation makes Thelma happier. Because the reallocation makes both Lou and Thelma happier, it is a Pareto improvement. For further review see section “Efficiency in Markets: Exchange Efficiency”.
]]>U_{L}, so the reallocation makes Lou happier. The reallocation also leaves Thelma with two pizzas and two sodas. That bundle is farther from Thelma’s origin (in the upper right corner) than her initial indifference curve, *U*_{T}, so the reallocation makes Thelma happier. Because the reallocation makes both Lou and Thelma happier, and leaves nobody else worse off, it meets the criteria for a Pareto improvement. For further review see section “Efficiency in Markets: Exchange Efficiency”.
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