At a Pareto-efficient allocation of inputs: the firms will have equal marginal r
ID: 1207512 • Letter: A
Question
At a Pareto-efficient allocation of inputs:
the firms will have equal marginal rates of technical substitution.
the MRTS of one firm is equal to W/R, while the MRTS of the other firm is equal to R/W.
the firms must be producing the same quantity of output.
one firm will have a higher MRTS than the other.
the firms will have equal marginal rates of technical substitution.
the MRTS of one firm is equal to W/R, while the MRTS of the other firm is equal to R/W.
the firms must be producing the same quantity of output.
one firm will have a higher MRTS than the other.
Explanation / Answer
A Pareto optimal point is the point of efficiency equilibrium where resources are allocated in such a way that no one can be made better off without making other person worse off
At this point of equilibrium, the marginal rate of technical substitution MRTS of both the parties is equal. That is, rate of substitution of one input for another should be equal for both the parties, only then they will agree to the terms of trade.
Other conditions required for Pareto optimality are: MRS=MRTS and MRS=p1/p2
Thus, correct option is (A)
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