Suppose that an economy is producing on its production possibilities curve but is not producing quantities of each good where the marginal benefit equals the marginal cost for each good. This economy
A) should not change its production, because it cannot improve its allocation by shifting resources.
B) can improve its allocation by lowering the unemployment rate.
C) can improve its allocation by producing more of one good and less of the other.
D) can improve its allocation by producing more of both goods.

Question

Quizplus · Accepted Answer

If the economy is not producing quantities of each good where the marginal benefit equals the marginal cost for each good, it means that the current allocation of resources is not efficient. This implies that the economy can increase its overall welfare by adjusting its production mix. The best way to do so is by producing more of the good whose marginal benefit exceeds its marginal cost and produce less of the good whose marginal cost exceeds its marginal benefit. This reallocation of resources will help the economy move towards a point on the production possibilities curve where it can produce at a lower cost or produce more of one good without sacrificing the production of the other.

Suppose That an Economy Is Producing on Its Production Possibilities