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Consider an exchange economy with production (recall that firms are just machines used to produce consumption goods for the consumers as efficiently as possible). Firm
Consider an exchange economy with production (recall that firms are just machines used to produce consumption goods for the consumers as efficiently as possible). Firm 1 produces x and firm 2 produces y. Consumers' utility functions and firms' production functions are given by: U1=xy, MUx=y, MUy=x. Uz=xy, MUx=y, MU y=x. Q1=KL, MPL=K, MPK=L. Q2=KL, MPL=K, MPK=L. Consider the following allocation: x1 = 8, X2 = 40, y1 = 2, yz = 10, L1 = 24, K1 = 2, L2 = 12, K2= 1. a) Is this allocation efficient? If not, which of the three efficiency conditions does it violate? b) Can you identify one simple shift in inputs or outputs that makes at least one consumer better off without hurting the other? (Identify a trade that would accomplish this, you do not have to find an efficient allocation)
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