Question

4. Explain how production efficiency meets the condition for Pareto efficiency

Answer 1

Productive efficiency occurs when a good or service can be produced at lowest possible cost. productive efficiency is illustrate don production possibility frontier.All points on production possibility curve is productively efficient. A firm or producer said to be productively efficient when it is producing output at lowest point on average cost curve. It describes the maximum capacity of a firm or producer an produce output by using least cost combination of input factors Pareto efficiency is a situation where no individual can better off without making another individual worse off. Under Pareto efficiency, productive efficiency is attained when marginal rate of technical substitution of commodity X is equal to marginal rate of technical substitution of commodity. Efficiency in production is attained only on production contract curve. Production contract curve gives birth to production possibility curve ,when mapping from input space to output space According to productive efficiency under Pareto efficiency , it is impossible to produce more X without reducing the amount of Y. Productive efficiency meets the condition for Pareto efficiency can be achieved when MRTSlk of X =MRTSlk of Y