2. An economy is currently made up of a firm that produces bread, a firm that pr

Question

2. An economy is currently made up of a firm that produces bread, a firm that produces butter, and a consumer who consumes both bread and butter. Current production is 100 units of bread, 50 units of butter which the consumed by the consumer. If the output changed to 75 units of bread and 60 units of butter, the profit of the butter firm would go up by $42. The profit of the bread firm would go down by $76. The consumer prefers 75 bread and 60 butter to 100 bread and 50 butter. It is so much better that the consumer would pay $40 more to have 75 bread and 60 butter rather than have 100 bread and 50 butter. Explain, using the definition, why you know it is not Pareto Efficient to have the economy produce 100 bread and 50 butter.

Explanation / Answer

Pareto Efficiency is when you cannot make one party better off without making the other party worse off.

I am guessing that in this case, when 75 bread/60 butter are being produced, the consumer and the butter firm are better off than when 100 bread/50 butter are being produced, while only the bread firm is worse off.
That would be my guess.

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