604 PART • Information, Market Failure, and the Role of Government Karen’s Food 4F 3F 10F OK 6C Karen’s Clothing James’s Clothing B 2C 4C +1C 1C –1F 5C A 6C OJ 6F 7F 10F James’s Food F IGURE 16.4 EXCHANGE IN AN EDGEWORTH BOX Each point in the Edgeworth box simultaneously represents James’s and Karen’s market baskets of food and clothing At A, for example, James has units of food and unit of clothing, and Karen units of food and units of clothing 5C for Karen Karen’s allocation of food (3F) is read from right to left at the top of the box diagram beginning at OK; we read her allocation of clothing (5C) from top to bottom at the right of the box diagram We can also see the effect of trade between Karen and James James gives up 1F in exchange for 1C, moving from A to B Karen gives up 1C and obtains 1F, also moving from A to B Point B thus represents the market baskets of both James and Karen after the mutually beneficial trade Efficient Allocations A trade from A to B thus made both Karen and James better off But is B an efficient allocation? The answer depends on whether James’s and Karen’s MRSs are the same at B, which depends in turn on the shape of their indifference curves Figure 16.5 shows several indifference curves for both James and Karen Because his allocations are measured from the origin OJ, James’s indifference curves are drawn in the usual way But for Karen, we have rotated the indifference curves 180 degrees, so that the origin is at the upper right-hand corner of the box Karen’s indifference curves are convex, just like James’s; we simply see them from a different perspective Now that we are familiar with the two sets of indifference curves, let’s examine the curves labeled U 1J and U 1K that pass through the initial allocation at A Both James’s and Karen’s MRSs give the slope of their indifference curves at A James’s MRS of clothing for food is equal to 1/2, while Karen’s is The shaded area between these two indifference curves represents all possible allocations of