Suppose that we have a simple two-firm production economy with two goods: software and movie videos. At the present allocation of resources in the economy Bill is producing software at a marginal cost of $20 while Michael is producing movie videos at a marginal cost of $10. The current market price of software is $100 while the market price of movie videos is $40.
a. What is wrong with the current allocation of goods in this economy?
b. How should resources be reallocated in order to move to a more efficient allocation?