Question

Suppose that an economy is producing on its production possibilities curve but is not producing quantities of each good where the marginal benefit equals the marginal cost for each good. This economy:_______.
a. should not change its production because it cannot improve its allocation by shifting resources.
b. can improve its allocation by lowering the unemployment rate.
c. can improve its allocation by producing more of one good and less of the other.
d. can improve its allocation by producing more of both goods.

Answer 1

Answer:

The correct answer is option c.

Explanation:

Production possibilities curve the maximum possible bundles of two goods that an economy can produce using the limited resources and state of technology.  

The points on the production possibilities frontier show efficient bundles.  The economy needs to reduce the production of one good in order to increase the production of the other because of the scarcity of resources.  

If an economy is not producing at the point where marginal benefit and marginal cost are equal then it should reduce the production of a good and increase the production of another good to improve allocative efficiency.