Consider a country in autarky that produces two goods (apples and bananas) and u

Question

Consider a country in autarky that produces two goods (apples and bananas) and uses two inputs (capital and labor)."
Currently it has efficiency in production. The slope of the production possibility frontier (with apples on the x-axis) is 2/1. It also has efficiency of consumption. Roberta, a citizen of this country has marginal rate of substitution of ¼ (with apples on the x-axis)."
"a. (3) Define a Pareto Efficient exchange."
"b. (12) Is this economy efficient? If so, explain why so, if not, explain with an example of how you could improve"
"the economy with a Pareto efficient exchange."

Explanation / Answer

a. A pareto effecient exchange is a state wherein a reallocation of teh resources is not possible so as to make everyone better off. That is it is impossible to increase the payoff or welfare of one individual without making someone else worse off.

b. No this economy is not effecient. This is because the MRS not equal to MRTS. In this economy the consumption of the banana should be increased. That is move up along teh indiffernce curve and give away the apples for banana.

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