Pareto Analysis

Q3.
a) Pareto efficient outcome:
Since the heirloom is not split, the two Pareto efficient outcomes are:
Arun receives the heirloom (Arun $25, Beena $0) or Beena receives the heirloom (Beena $1, Arun $0).

b) If monetary side payments is allowed , then the Pareto efficient outcomes is as follows:

Beena Arun Illustration
0 25 Arun receives the heirloom
1 24 Arun get heirloom and gives beena $1
2 23
3 22
4 21
5 20
6 19
7 18
8 17
9 16
10 15
11 14
12 13 Arun get heirloom and gives beena $12
13 12 Been receives heirloom and gives Arun $12
14 11
15 10
16 9
17 8
18 7
19 6
20 5
21 4
22 3
23 2
24 1 Been receives heirloom and gives Arun $1
25 0 Beena receives the heirloom

Q4.

a) For the Union, it is preferable to have a high health care over a high pension. For management, it is preferable to have a low health care over low pension. Thus, an efficient agreement would be to have high health care and low pension.

b)

Pension Health Care Union Management Pareto efficient
Low Low 0 3 Yes
Low High 15 2 Yes
High Low 5 1 No
High High 20 0 Yes

Row three, high pension and low health care is Pareto inefficient. It is Pareto inefficient because both parties stand to gain from an alternative- the union would gain ten points if they moved to low pension and management would gain one.

c) Pareto efficient agreements do not change (as below). This is because the preferences didn’t change, just the scale of the preferences. Just as in part b, high pension- low health care is Pareto inefficient because both groups would gain from moving to low pension- high health care.

Pension Health Care Union Management Pareto efficient
Low Low 0 3 Yes
Low High 15 20 Yes
High Low 5 10 No
High High 20 0 Yes