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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

  1. 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.
  2. Efficiency in production requires that the MRTS between capital and labour be the same for all goods produced.
  3. 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.
  4. 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.

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