Lily owns 3 iced milk coffee bottles and 9 toasted pieces of bread while Devon owns 8 iced milk coffee bottles and 4 toasted pieces of bread. Given these resources, the marginal rate of substitution (MRS) for toasted bread and milk coffee for Lily and Devon is 4 and 2, respectively. Draw an Edgeworth box diagram and explain whether the resource allocation between Lily and Devon is efficient. If this allocation is inefficient, explain what should Lily and Devon substitute to obtain higher utility.

Suppose producing iced milk coffee and toasted bread need capital and labor, and the price of capital is 4 per unit. Given the ratio of marginal product of labor (MPL) to the marginal product of capital (MPK) is 2 for milk coffee production and 1/2 for toasted bread production, prove and explain whether the allocation of resources in iced milk coffee and toasted bread production is efficient. If not, what should you do to achieve efficient production? Use the relevant graph to support your answer

Suppose a simple economy only produces two goods: bicycles and shoes, and the government imposes tax only on bicycles but not on shoe consumption. Will this policy yield an efficient production mix? Explain your answer and use a relevant graph.

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Answer Marginal Rate of Substitution MRS An Edgeworth box diagram can be used to illustrate the marginal rate of substitution MRS between Lily and Devon The diagram would show that Lily has 3 iced mil... View the full answer