9. Explain what is the role played by convexities in the two welfare theorems.
9. Explain what is the role played by convexities in the two welfare theorems.
Homework Answers
The two welfare theorems are as follows; according to the first welfare theorem, all competitive market equilibria are pareto optimal based on the assumptions that market are complete.i.e. there is perfect information and firms are price takers and preferences satisfy non satiation. The second welfare theorem implies that all pareto optimal allocation are competitive equilibria if and only if preferences are convex.i.e. everyone will be indifferent between the commodity bundle and endowment and nobody will be better off by deviating from the optimal allocation.
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9. Explain what is the role played by convexities in the two
welfare theorems.
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