Page 703 - Microeconomics, Fourth Edition

c16GeneralEquilibriumTheory.qxd 8/16/10 9:14 PM Page 677

16.4 THE EFFICIENCY OF COMPETITIVE MARKETS 677

Labor used by food producer
10 9 0
Energy
producer

Direction
in which Capital used by food producer
output
Total amount of capital available Capital used by energy producer 6 G producer Input contract curve 4
increases
Food

H

0 1 I 10
Labor used by energy producer
Total amount of labor available

FIGURE 16.17 Input Efficiency in the Edgeworth Box
Isoquants for the food producer and the energy producer cross at point G and are tangent
at points H and point I. Point G (and any other point where isoquants cross) does not
represent an allocation of inputs that is economically efficient, because at either point
inputs could be reallocated in a way that would simultaneously increase outputs in both
industries. Points H and I (and all other points where isoquants are tangent) do represent
allocations of inputs that are economically efficient, because reallocation at such points
would decrease output in at least one industry. The input contract curve connects all the
allocations that satisfy input efficiency.

producers (denoted by x) and food producers (denoted by y) are both equal to the ratio
of the price of labor (w) to the price of capital (r):

y
x
MRTS l, k MRTS l, k w
r
Since the marginal rates of technical substitution are the absolute values of the slopes
of the isoquants in energy and food production, and since these slopes are equal at a
competitive equilibrium (where isoquants are tangent), it follows that a general com-
petitive equilibrium satisfies input efficiency. That is, there is no reallocation of inputs
across industries that would allow one industry to increase its output without reduc-
ing output in the other industry.