Pareto EfficiencyConsider an economy with two people, Nancyand Roger, and two commodities, tea andbiscuits. Currently, Nancy and Roger wouldboth be willing to substitute two cups of teafor one biscuit. Further, if the economy wereto produce one less cup of tea, the resourcesreleased from tea production could be usedto produce three more biscuits.a. What is the value of the marginal rate ofsubstitution and the marginal rate oftransformation?b. Is the allocation in this economy Paretoefficient? Show graphically by drawing theindifference curve and the productionpossibilities schedule into the figure below. Ifnot, should there be more tea or morebiscuits?c. Explain why an economy in which airlinescharge different passengers, different pricesfor the same flight is not Pareto efficient;when all passengers have the samepreferences.d. Consider an economy which produces twogoods, cars and shirts. Explain why if a tax isimposed on the consumption of cars but noton shirts, the economy will not be efficient.e. Is it always better if the governmentintervenes when markets fail? Why (not)?

Pareto efficiency is a state where it is not possible to redistribute resources in a way that…

Consider an economy with two people, Nancy and Roger, and two commodities, tea and biscuits. Currently, Nancy and Roger would both be willing to substitute two cups of tea for one biscuit. Further, if the economy were to produce one less cup of tea, the resources released from tea production could be used to produce three more biscuits.

Consider an economy with two people, Nancy and Roger, and two commodities, tea and biscuits. Currently, Nancy and Roger would both be willing to substitute two cups of tea for one biscuit. Further, if the economy were to produce one less cup of tea, the resources released from tea production could be used to produce three more biscuits.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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