In Figure E.11.1, we have drawn a so called Edgeworth-box. It shows isoquants and quantities for the production of two goods, apples and bananas, given different combinations of labor and capital.
a) Point a does not represent an efficient production of apples and bananas. Why not?
b) Indicate all points in the graph that are Pareto improvements compared to point a.
c) Indicate all points in the graph that are both Pareto improvements as compared to a, and are Pareto efficient. An approximate answer is sufficient.
d) What is the criterion for Pareto efficient production? What does that correspond to in the figure?
e) What is the "production contract curve"? Draw an approximate production contract curve in the graph.
f) In Figure E.11.2, we have drawn the two axes for a production transformation curve (production possibilities curve). Use the information from Figure E.11.1 to construct the full curve.
g) Suppose we produce in point b in Figure E.11.2. That point is not efficient. What is the
alternative cost of changing to an efficient production?