1. When can an economy increase the production of one good without reducing the ouput of...

1. When can an economy increase the production of one good without reducing the ouput of another?

2. What is the difference between Productive Efficiency and Allocative Efficiency? Can you provide examples that can help illustrate the difference between the two?

Expert Solution

Q1) An economy can increase the production of one good without reducing the output of another if it is operating inside the production possibility frontier (not on the PPF curve) and there are unemployed resources. These resources can be utilized to increase the production of one good without changing the output of another.

Q2) Productive efficiency means that production is happening on the PPF curve. More of one good can no be produced without decreasing another. Allocative efficiency means that the combination of goods produced is most wanted by the society such that welfare is maximized. Allocative efficiency occurs where price = marginal cost (MC). For example, suppose there are two production sets A and B, both lie on the PPF, but A involves more cars and less milk wheres B involves more milk and less cars. Suppose the economy produces at A but the society desired B more. Now, production is productive efficient but not allocative efficient.

Rahul Sunny answered 2 years ago

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