Suppose an economy produces milk and honey, and milk is plotted along the horizontal axis of the production possibilities frontier. The MRT is 2.5 at the current point of production, and the price of honey is $5 per unit. What is the current price of milk if the market outcome is efficient?
A) $12.50 per unit
B) $10 per unit
C) $2 per unit
D) $1 per unit

Question

Quizplus · Accepted Answer

The MRT (marginal rate of transformation) of 2.5 means that 2.5 units of milk are given up to produce one more unit of honey. For efficiency, the price ratio should equal the MRT. Thus, the price of milk should be $5/2.5 = $2 per unit.

Suppose an Economy Produces Milk and Honey, and Milk Is