Consider an economy with 100 units of labor and capital that must be completely distributed to Firms X and Y. With this information, recommend an efficient allocation of the two inputs between the two firms. Discuss and show the necessary solution to support your recommendationX = KL2 – L3;Y = 10K1.5L0.5;Graphically illustrate and discuss how an economy can achieve production efficiency if at its current allocation on L and K, the MRTSLKY > MRTSLKZ (you may use your own values to represent the available L and K and the initial distribution)

The aim is to explain efficient allocation and then examine how an economy can achieve production…

Business

Economics

Consider an economy with 100 units of labor and capital that must be completely distributed to Firms X and Y. With this information, recommend an efficient allocation of the two inputs between the two firms. Discuss and show the necessary solution to support your recommendation

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter13: General Equilibrium And Welfare

Section: Chapter Questions

Problem 13.6P

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Concept explainers

Productive and Allocative Efficiency Analysis

Productive efficiency, also referred to as production efficiency is a term in economics describing the level at which a company is operating at its maximum capacity. Beyond this point, the entity will be unable to manufacture any additional goods without cutting down another product’s production level. This occurrence is an outcome of production happening alongside a Production Possibility Frontier (PPF).

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Consider an economy with 100 units of labor and capital that must be completely distributed to Firms X and Y. With this information, recommend an efficient allocation of the two inputs between the two firms. Discuss and show the necessary solution to support your recommendation

X = KL² – L³;
Y = 10K^1.5L^0.5;

Graphically illustrate and discuss how an economy can achieve production efficiency if at its current allocation on L and K, the MRT_SLK^Y> MRTS_LK^Z (you may use your own values to represent the available L and K and the initial distribution)

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Graphically illustrate and discuss how an economy can achieve production efficiency if at its current allocation on L and K, the MRTSLKY > MRTSLKZY = 10K1.5L0.5;Z = K0.5L0.5
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