Only Answer PART (b) Please provide clear solutions with clear steps and explanations - DO NOT answer if you are not confident. a) Consider an economy with 3 agents, Mohammed (M), David (D) and Susan (S). There aretwo goods available, good x, and good y. The marginal rates of substitution (where good x ison the horizontal axis and good y is on the vertical axis) are given by MRSXy = 2yM/XM forMohammed, MRSxy = 2y/xp for David and MRSy = ys/xs for Mohammed and David areboth consuming twice as much of the good x than good y, while Susan is consuming equalamounts of x and y. What are the conditions for Pareto efficiency in an exchange economy?Are these consumption levels economically efficient? Can these consumption allocations beobserved in a perfectly competitive equilibrium in an exchange economy without production?Explain.b) There are two firms in the economy. Each firm employs positive amounts of capital andlabour. The technology satisfies diminishing marginal rate of technical substitution of labourfor capital. Currently, A's marginal rate of technical substitution of labour for capital is 4 whileB's marginal rate of technical substitution of labour for capital is 2. Is the current production ofthe two firms efficient? If not, describe an exchange of inputs that would improve efficiency.Can these production levels of the two firms be observed in a perfectly competitive equilibriumof a production and exchange economy? Explain.

Technical rate of substitution is the rate at which one unit of input is substituted for the units…

b) There are two firms in the economy. Each firm employs positive amounts of capital and labour. The technology satisfies diminishing marginal rate of technical substitution of labour for capital. Currently, A's marginal rate of technical substitution of labour for capital is 4 while B's marginal rate of technical substitution of labour for capital is 2. Is the current production of the two firms efficient? If not, describe an exchange of inputs that would improve efficiency. Can these production levels of the two firms be observed in a perfectly competitive equilibrium of a production and exchange economy? Explain.

b) There are two firms in the economy. Each firm employs positive amounts of capital and labour. The technology satisfies diminishing marginal rate of technical substitution of labour for capital. Currently, A's marginal rate of technical substitution of labour for capital is 4 while B's marginal rate of technical substitution of labour for capital is 2. Is the current production of the two firms efficient? If not, describe an exchange of inputs that would improve efficiency. Can these production levels of the two firms be observed in a perfectly competitive equilibrium of a production and exchange economy? Explain.

Microeconomics: Principles & Policy

14th Edition

ISBN:9781337794992

Author:William J. Baumol, Alan S. Blinder, John L. Solow

Publisher:William J. Baumol, Alan S. Blinder, John L. Solow

Chapter5: Consumer Choice: Individual And Market Demand

Section: Chapter Questions

Problem 3DQ

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