Question

Which one of the following statements is CORRECT for the general equilibrium analysis for a two-person and two-good pure exchange economy?

• A. Some points on the contract curve may not be Pareto optimal.
• B. Endowment point cannot be on the boundary of the Edgeworth Box.
• C. Equilibrium prices are endogenously determined.
• D. In equilibrium, net demand for a good is either positive or negative but cannot be zero.

Hint:

In general equilibrium, prices and allocations are determined simultaneously within the system.

Answer 1

The Correct Option is C

Step 1: Set the scene.
Two people swap two goods with fixed total stocks. The Edgeworth box shows every way these goods can be shared.

Step 2: Check the contract curve claim.
The contract curve is built only from Pareto optimal points, where no one can gain without someone losing. So saying some of its points are not Pareto optimal is wrong.

Step 3: Check the endowment claim.
The starting bundle can sit anywhere, inside the box or right on an edge. So the claim that it cannot lie on the boundary is wrong.

Step 4: Check the price claim.
In general equilibrium the prices are not given from outside. They come out of the demand and supply balance inside the model, so they are endogenous. This one is correct.

Step 5: Check the net demand claim.
When markets clear, net demand for a good can be zero. So the last claim is wrong.

Step 6: Conclude.
\[ \boxed{\text{Equilibrium prices are endogenously determined.}} \]