Reference no: EM131715286

Explain, based on the given information about the economy, whether the current situation for the economy is Pareto efficient or not. If it is not, give a specific example of a change that makes someone better off and no one worse off. If it is PE, explain why every change that helps someone hurts someone else.

a) An economy is currently made up of a firm that produces bread, a firm that produces butter, and a consumer who consumes both bread and butter. Current production is 100 units of bread, 50 units of butter which the consumed by the consumer. If the output changed to 75 units of bread and 60 units of butter, the profit of the butter firm would go up by $42. The profit of the bread firm would go down by $76. The consumer prefers 75 bread and 60 butter to 100 bread and 50 butter. It is so much better that the consumer would pay $40 more to have 75 bread and 60 butter rather than have 100 bread and 50 butter.

b) An economy has two consumers, a total of 7 apples and 8 oranges. Both goods only available in whole quantities. Currently consumer R has 6 apples and 7 oranges and consumer P has the remaining apples and oranges. For Consumer R, 6 apples and 7 oranges(current allocation) is indifferent to 7 apples and 5 oranges as well as 3 apples and 8 oranges. For Consumer P, 1 apple and 1 orange(current allocation) is indifferent to 0 apples and 3 oranges as well as 4 apples and 0 oranges.