Consider an economy with two identical people, Victoria and Albert, and two commodities, tea and crumpets....
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 300 cups of tea. If all the resources were devoted to crumpet production, the economy could produce 200 crumpets. Currently, the economy is producing 180 crumpets and 100 cups of tea. At this allocation, Victoria and Albert would both be willing to substitute 25 crumpets for 25 cups of tea. Further, at this allocation, if the economy were to produce 25 less crumpets, the resources released from tea production could be used to produce 54 more cups of tea.
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 (180 crumpets, 100 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 x-axis and cups of tea on the y-axis. Label the current allocation A on your graph.
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Consider an economy with two identical people, Victoria and
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