Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A simple economy produces two goods, food and clothing, with two inputs, capital and labour. Given the current allocation of capital and labour between the
- A simple economy produces two goods, food and clothing, with two inputs, capital and labour. Given the current allocation of capital and labour between the two industries, the marginal rate of technical substitution between capital and labour in food production is 4, while the corresponding MRTS in clothing production is 2. Is this economy efficient in production? If so, explain why. If not, describe a reallocation that will lead to a Pareto improvement.
- Efficiency in production requires that the MRTS between capital and labour be the same for all goods produced.
- The MRTS of 4 in food production means that if we reduce capital by 1 unit we need to add only 1/4 of a unit of labour to maintain the original level of output.
- The MRTS of 2 in clothing production means that if we reduce labour by 14 of a unit we need to add only 1/2 of a unit of capital to restore the original level of clothing output.
Explain the ANSWER STEP BY STEP, especially 4 AND 5 PLEASE!
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started