Question: A simple economy produces two goods food and clothing with
A simple economy produces two goods, food and clothing, with two inputs, capital and labor. Given the current allocation of capital and labor between the two industries, the marginal rate of technical substitution between capital and labor in food production is 4, while the corresponding MRTS in clothing production is 2. Is this economy efficient in production? If so, explain why. If not, describe a reallocation that will lead to a Pareto improvement.
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