b) There are two firms in the economy. Each firm employs positive amounts of capital and labour. The technology satisfies diminishing marginal rate of technical substitution of labour for capital. Currently, A's marginal rate of technical substitution of labour for capital is 4 while B's marginal rate of technical substitution of labour for capital is 2. Is the current production of the two firms efficient? If not, describe an exchange of inputs that would improve efficiency. Can these production levels of the two firms be observed in a perfectly competitive equilibrium of a production and exchange economy? Explain.
b) There are two firms in the economy. Each firm employs positive amounts of capital and labour. The technology satisfies diminishing marginal rate of technical substitution of labour for capital. Currently, A's marginal rate of technical substitution of labour for capital is 4 while B's marginal rate of technical substitution of labour for capital is 2. Is the current production of the two firms efficient? If not, describe an exchange of inputs that would improve efficiency. Can these production levels of the two firms be observed in a perfectly competitive equilibrium of a production and exchange economy? Explain.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Only Answer PART (b)
Please provide clear solutions with clear steps and explanations - DO NOT answer if you are not confident.
Transcribed Image Text:a) Consider an economy with 3 agents, Mohammed (M), David (D) and Susan (S). There are
two goods available, good x, and good y. The marginal rates of substitution (where good x is
on the horizontal axis and good y is on the vertical axis) are given by MRSXy = 2yM/XM for
Mohammed, MRSxy = 2y/xp for David and MRSy = ys/xs for Mohammed and David are
both consuming twice as much of the good x than good y, while Susan is consuming equal
amounts of x and y. What are the conditions for Pareto efficiency in an exchange economy?
Are these consumption levels economically efficient? Can these consumption allocations be
observed in a perfectly competitive equilibrium in an exchange economy without production?
Explain.
b) There are two firms in the economy. Each firm employs positive amounts of capital and
labour. The technology satisfies diminishing marginal rate of technical substitution of labour
for capital. Currently, A's marginal rate of technical substitution of labour for capital is 4 while
B's marginal rate of technical substitution of labour for capital is 2. Is the current production of
the two firms efficient? If not, describe an exchange of inputs that would improve efficiency.
Can these production levels of the two firms be observed in a perfectly competitive equilibrium
of a production and exchange economy? Explain.
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