1.Production efficiency. A)state the condition for production in terms of which
ID: 1189014 • Letter: 1
Question
1.Production efficiency.
A)state the condition for production in terms of which slopes are equal. use terms such as MRS,MRTS,MRT,and/or - P horizontal/P vertical P horizontal refers to the price of the good on the horizontal axis. Use subscripts and/or superscripts on MRS and MRTS as appropriate. In this case, P horizontal is the cost of labor (w)and P vertical is the cost of capital(r)
B) Draw an Edgeworth box for production efficiency. The K and L isoquants should show both inefficient ( crossing and efficient ( tangent) relationships.
C) Explain why points at isoquant intersection are inefficient. This answer has nothing to do with the answer to 1a above. The answer to this question is not whether the curves cross or are tangent but rather what happens to production levels at the same cost as production is moved to an efficient point on the contract curve.
D) State two governmental policies which could cause the production mix to remain at an inefficient point. This is the same as saying what policies could prevent the prices of the two factors of production(w/r) from adjusting to offer the same relative cost of inputs to all producers.
Explanation / Answer
A. Given the inputs labour w and Capital r production equilibrium occurs when the marginal rate of substitution from the consumer'S pers perspective matches the marginal rate of technical substitution among the two factors of production
Thus MRSAwr=MRSBwr=MRTSwr
B. please see attachrd the edgeworth box diagram where two producers are utilizing different quantities of K and L based on the maximum amount of each of these available resources. An isoquant is a set of combination of K and L that produce the same quantity of goods. iso quants that are efficient are generally parallel while those that are inefficient are the ones in which one isoquant intersects the other
C. isoquants reflect different production possibilities often resulting out of an increase in available factors of production or a change in factors of production. Iso quants which are parallel are efficient because the economy has expanded on account of greater availability of factors of production. on thr other hand if isoquants intersect it indicates that despite greater availabiluty of factors of production the economy is producing the same amount of goods as it was earlier pointing to inefficient use of factors of production
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