Suppose that an economy produces two goods, coffee and tea. At current margins, consumers are willing to exchange 4 units of tea for 1 unit of coffee and firms can produce 1 unit of coffee at the expense of 2 units of tea. To be efficient, the economy should produce

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BlackTom AI · Accepted Answer

Here we analyze the trade-offs in production given the stated margins.
Option A: less coffee and more tea. This would move resources away from the relatively more valuable coffee (in terms of the tea you could obtain) toward tea, but since the marginal willingness to trade coffee for tea is 1 coffee = 4 tea while producing 1 coffee costs 2 tea, reducing coffee would reduce total surplus. This option is unlikely to be efficient.
Option B: more coffee and less tea. The market values coffee at 4 units of tea per cup, while producing one cup of coffee consumes 2 units of tea. Since 2 < 4, producing another unit of coffee adds more value (net gain of 2 tea’s worth of surplus) than it costs in tea, so shifting resources toward more coffee increases total surplus until the marginal values align with production costs.
Option C: more coffee and more tea. Producing more of both goods would require more resources overall; with fixed resources, you cannot simultaneously increase both outputs in efficiency terms. This option cannot be Pareto-efficient because you’d be re-allocating from tea to coffee for a gain.
Option D: less coffee and less tea. Reducing both outputs would typically reduce total surplus given the positive net gain from producing coffee (as shown above). This is not the efficient allocation when one good yields net benefit per unit produced.
In summary, because the value of coffee in terms of tea (4 tea per coffee) exceeds its production cost in tea (2 tea per coffee), the efficient production point is to shift toward more coffee and less tea, maximizing overall surplus.

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Suppose that an economy produces two goods, coffee and tea. At current margins, consumers are willing to exchange 4 units of tea for 1 unit of coffee and firms can produce 1 unit of coffee at the expense of 2 units of tea. To be efficient, the economy should produce

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Dashboard Sample Quiz (0%)

Suppose that an economy produces two goods, coffee and tea. At current margins, consumers are willing to exchange 4 units of tea for 1 unit of coffee and firms can produce 1 unit of coffee at the expense of 2 units of tea. To be efficient, the economy should produce

View Explanation

Log in for full answers

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Imperfectly competitive markets do not achieve allocative efficiency because profit maximization for each firm occurs when which of the following is true?

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