Answer to Question #200978 in Microeconomics for alisa

Question

QUESTION 2

a) Kembang has 6 bags of sweet potato and 18 bagels. Tam Tam, on the other

hand, has 16 bags of sweet potato and 8 bagels. Kembang’s marginal rate of

substitution (MRS) of potatoes for bagels is 6 and Tam Tam’s MRS is equal

to 4. Draw an Edgeworth box diagram to show whether this allocation of

resources is efficient. Justify your answer with an economic suggestion.

(15 marks)

b) A contract curve is a curve in which all points along it is socially desirable.

TRUE or FALSE? Justify your answer clearly. (15 marks)

c) In a hypothetical country named Country Adeng, there are only two goods

produced and consumed: Good 1 and 2. The MRS is 2 and this means, the

consumers give up 2 Good 1 in order to consume one additional unit of Good

2. On the other hand, the MRT is 4. The economic advisors of Country

Adeng suggested to their Prime Minister that the current situation of MRS

and MRT of this country is in a good shape. Are they right? Justify your

answer clearly. (15 marks)

Answer 1

a.

The edge worth has dimensions equal to the total economy resources. Therefore nothing is wasted as there are no left over resources available at any spot in the box.

b.

The statement is TRUE.

This is because the contract curve shows a set of points that represent final allocations of two goods that possibly could occur because of mutual beneficial trading between the people given their initial allocations of the goods.

c.

The economic advisors are not right because if MRS<MRT, then the cost of additional good 2 exceeds the value of good 2 and the economy would reduce production and consumption of good 2 in favor of good 1