Consider an economy with two identical people, Victoria and Albert, and two commodities, tea and crumpets....
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Consider an economy with two identical people, Victoria and Albert, and two commodities, tea and crumpets. Assume that if all resources in the economy were devoted to tea production, the economy could produce 200 cups of tea. If all the resources were devoted to crumpet production, the economy could produce 100 crumpets. Currently, the economy is producing 25 crumpets and 180 cups of tea. At this allocation, Victoria and Albert would both be willing to substitute two cups of tea for one crumpet. Further, at this allocation, if the economy were to produce one less cup of tea, the resources released from tea production could be used to produce 4 more crumpets. Is the current allocation of resources in this economy Pareto efficient? If not, should there be more tea produced or more crumpets produced? Illustrate the current allocation (25 crumpets, 180 cups of tea) using indifference curves (since Victoria and Albert are identical you can use just one indifference curve) and a production possibilities curve. Put crumpets on the y-axis and cups of tea on the x-axis. Label the current allocation A on your graph. Consider an economy with two identical people, Victoria and Albert, and two commodities, tea and crumpets. Assume that if all resources in the economy were devoted to tea production, the economy could produce 200 cups of tea. If all the resources were devoted to crumpet production, the economy could produce 100 crumpets. Currently, the economy is producing 25 crumpets and 180 cups of tea. At this allocation, Victoria and Albert would both be willing to substitute two cups of tea for one crumpet. Further, at this allocation, if the economy were to produce one less cup of tea, the resources released from tea production could be used to produce 4 more crumpets. Is the current allocation of resources in this economy Pareto efficient? If not, should there be more tea produced or more crumpets produced? Illustrate the current allocation (25 crumpets, 180 cups of tea) using indifference curves (since Victoria and Albert are identical you can use just one indifference curve) and a production possibilities curve. Put crumpets on the y-axis and cups of tea on the x-axis. Label the current allocation A on your graph.
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