What Is Contract Curve?

A contract curve is a graphical representation of the set of possible combinations of two agents’ utility functions that can lead to a Pareto efficient outcome in an exchange economy. The contract curve is also sometimes called the Edgeworth box. The concept was first developed by Francis Ysidro Edgeworth.

In general, a contract curve shows the set of outcomes that are possible when two people are trying to reach an agreement. Each person has something that they want, and they have to negotiate with each other to try to get the best deal possible. The contract curve shows all of the different ways that the two people could come to an agreement.

There are usually four different types of outcomes that can happen when two people are negotiating. The first is that both people could get what they want. This is called a Pareto efficient outcome, and it is represented by the top left corner of the contract curve. The second type of outcome is that one person gets what they want and the other person does not. This is called a dominated outcome, and it is represented by the bottom right corner of the contract curve. The third type of outcome is that both people do not get what they want. This is called an inefficient outcome, and it is represented by the top right corner of the contract curve. The fourth type of outcome is that one person gets what they want and the other person gets something that they do not want. This is called an externality, and it is represented by the bottom left corner of the contract curve.

The contract curve is a useful tool for understanding how two people can reach an agreement. It can also be used to help find Pareto efficient outcomes in an economy.

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