Question: Suppose that there are two industries and two consumers. Each industry uses both capital K and labor L in the production process, and each produces a different good, X in one and Y in the other. Consumers get utility from X and Y. Both goods are private.
a) Write down and explain intuitively the conditions for this economy to be pareto efficient.
b) Define the production possibility frontier and relate it to the efficiency conditions.
c) Define both the grand utility possibility frontier and a utility possibility frontier and relate them to the efficiency conditions.
d) Explain under what circumstances a society might prefer an inefficient allocation of resources to an efficient allocation. (Hint: your answer will be made simple if you use the appropriate diagram.)