a. Because the marginal cost of producing a watch is 10 times that of producing a chocolate, Switzerland must give up 10 chocolates to produce another watch.

b. Because Switzerland must give up 10 chocolates to produce another watch, the marginal rate of transformation from chocolates to watches is 10.

c. The marginal rate of substitution between chocolates and watches is equal to the ratio of their marginal utilities. Because, at the margin, a watch brings Swiss consumers three times as much utility as a chocolate; Swiss consumers should be willing to give up 3 chocolates to obtain another watch. The MRS is 3.

d. Switzerland is not achieving output efficiency, because the MRS (3) does not equal the?MRT (10).

Transcribed Image Text:

At A, producers can only make another watch by sacrificing 10 chocolates. Chocolates Slope of PPF = –10 At A, consumers are only willing to sacrifice 3 chocolates to obtain another Slope of IC= -3 PPF watch Watches