Consider an economy that produces two goods, a private good X and a public good G. The production function is such that it takes 1 unit of X to produce 2.5 units of G. This economy has only two individuals, A and B. At the current allocation, A's marginal utility of G is 2 while her marginal utility of X is 1. In contrast, B's marginal utility of G is 1 while her marginal utility of X is 2.

Which of the following statements is TRUE?

(a) This economy can obtain a Pareto improvement by increasing the production of G.

(b) This economy can obtain a Pareto improvement by increasing the production of X.

(c) The current allocation is Pareto efficient.

(d) Cannot be determined from the given information.

Answer rating: 100% (QA)

c The current allocation is Pareto efficient In order to improve the welfare of both i... View the full answer