Suppose an economy produces milk and honey, and milk is plotted along the horizontal axis of the production possibilities frontier. If the production in the economy is centrally planned (and not market oriented) so that the MRS for the current production level is 3 but the MRT is 2, then there will be an excess ________ for milk and an excess ________ for honey.
A) demand; supply
B) demand; demand
C) supply; demand
D) supply; supply
E) The market is in equilibrium, and there are no imbalances in supply or demand.

Question

Quizplus · Accepted Answer

The MRS (marginal rate of substitution) being greater than the MRT (marginal rate of transformation) indicates that consumers value milk more than the opportunity cost of producing it, leading to excess demand for milk and excess supply of honey.

Suppose an Economy Produces Milk and Honey, and Milk Is