Figure 19-3 illustrates the determination of an efficient output mix in a two good economy.The output combination is represented by point Z and the consumption point of a representative consumer is W.The slope of the line zz represents the marginal rate of transformation [MRT].
-Refer to Figure 19-3.Suppose the marginal rate of substitution [MRS] at point W is 3Y/2X instead of 2Y/1X.Which of the following will be true?
A)The representative consumer's MRS will be less than the MRT,which implies more Y and less X will make all consumers better off.
B)The economy will be producing an efficient output combination.
C)The representative consumer's MRS 3Y/2X will be less than the MRT,which implies more X and less Y will make both consumers better off.
D)The allocation of the goods between the two individuals is efficient.

Question

Figure 19-3 illustrates the determination of an efficient output mix in a two good economy.The output combination is represented by point Z and the consumption point of a representative consumer is W.The slope of the line zz represents the marginal rate of transformation [MRT]. 
-Refer to Figure 19-3.Suppose the marginal rate of substitution [MRS] at point W is 3Y/2X instead of 2Y/1X.Which of the following will be true?
A)The representative consumer's MRS will be less than the MRT,which implies more Y and less X will make all consumers better off. 
B)The economy will be producing an efficient output combination. 
C)The representative consumer's MRS 3Y/2X will be less than the MRT,which implies more X and less Y will make both consumers better off. 
D)The allocation of the goods between the two individuals is efficient.

Quizplus · Accepted Answer

The MRS is the rate at which the consumer is willing to substitute one good for the other, while the MRT is the amount of one good that must be given up to produce one additional unit of the other good. If the MRS at point W is 3Y/2X instead of 2Y/1X, it means that the consumer is willing to give up more Y to get an additional unit of X. This implies that the consumer values X more highly than Y, and therefore, the slope of the indifference curve at point W is steeper than the slope of the line zz (MRT). Hence, the consumer's MRS will be less than the MRT, which implies that more Y and less X will make the consumer better off. Therefore, the best choice is A.

Figure 19-3 Illustrates the Determination of an Efficient Output Mix