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1. (20) A country has only two goods, A and B, and two inputs, K and L. All consumers have the same marginal rate of
1. (20) A country has only two goods, A and B, and two inputs, K and L. All consumers have the same marginal rate of substitution: dB/dA =-2. All firms have the same marginal rate of technical substitution: dK/dL = -1/3. The country is on its production possibility frontier with dB/dA = -1/3. (2) a. What does the above MRS imply about the tradeoffs the consumer is willing to make? (2) b. What does the above MRTS imply about trade-offs the firms are willing to make? (1) c. What does the above MRT imply about the trade-offs for the country? (7) d. Is the economy Pareto Efficient, or is more information needed? Points based only on explanation (you may use a logical example to show it is (not) efficient, or state what more information is needed). (8) e. In a competitive economy, what does the slope of the PPF equal in terms of prices, and explain why
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