The economy of Dunk, IN, produces only two goods, bagels
and doughnuts, using labor as the only factor of production.
There are 8 workers in Dunk and all are paid the same wage.
The accompanying table shows the amount of output that can
be produced with a certain number of workers.
a. Suppose that the price of a doughnut is $0.50 and the
price of a bagel is also $0.50. There are 2 workers producing doughnuts and 3 workers producing bagels. The other
3 workers are unemployed. Given what you know about
the relationship between the value of the marginal products and efficiency, determine whether this economy is
efficient in the production of doughnuts versus the production of bagels—that is, is the economy efficient in output levels? Also determine whether the economy is
efficient in production—that is, is it producing on the production possibility frontier?
b. Suppose that the price of doughnuts is $0.20, and the
price of bagels is $0.10. There are 4 workers producing
doughnuts and 4 workers producing bagels, and nobody is
unemployed. Is this economy efficient in production? Is it
efficient in output levels?
c. Initially, the price of doughnuts is $0.20, the price of
bagels is $0.10, and there are 4 workers producing doughnuts and 4 workers producing bagels, just as in part b.
Now consumers’ tastes change: due to health concerns,
consumers are now willing to pay $0.75 per bagel but only
$0.10 per doughnut. These new prices act as signals of
consumers’ preferences. In response to this change, will
the allocation of workers to bagel or doughnut production
change?