Whenever the economy operates below the production possibility frontier in a general equilibrium with production:

Question

Quizplus · Accepted Answer

If the economy operates below the production possibility frontier, then it is not utilizing all of its resources efficiently. Therefore, the allocation in the production Edgeworth box will be off the contract curve, meaning that there are potential gains from trade that are not being realized. Choice A is not necessarily true, as the MRS can be equal even if the economy is not utilizing its resources efficiently. Choice B is not true because Pareto efficiency requires the economy to be operating at its production possibility frontier. Choice D is not necessarily true, as fairness can be an issue regardless of whether the economy is operating below or above its production possibility frontier.

Whenever the Economy Operates Below the Production Possibility Frontier in a General