Exploring Product-Mix Efficiency

4. Cuba is one of the poorest nations in the world. However, it produces a large number of athletes who capture Olympic medals. Is this athletic prowess an indication of success for the Cuban way of life, or is it a sign of folly and foolishness? Whatever position you take, argue your position in terms of the production-possibilities frontier.

5. Suppose the economy consists of four individuals who produce as follows:

Bananas

Coconuts
Dave
2
or
1
Ed
1
or
1
Fred
1
or
1
Greg
1
or
2

Construct their production-possibilities frontier:

Bananas
Coconuts
5
4
3
2
0

Below are their demand curves for bananas and coconuts:

Bananas
Coconuts
Quantity
Willingness to pay
Quantity
Willingness to pay
1
$10
1
$11
2
9
2
9
3
8
3
7
4
6
4
5
5
4
5
3

What is the total value of five bananas?

Let us see what happens if we move along the production-possibilities frontier:
Moving from 5 to 4 bananas results in a loss of value of $ for bananas and a gain in value of $ for coconuts.

Moving from 4 to 3 bananas results in a loss of value of $ for bananas and a gain in value of $ for coconuts.

Moving from 3 to 2 bananas results in a loss of value of $ for bananas and a gain in value of $ for coconuts.

Moving from 2 to 0 bananas results in a loss of value of $ for bananas and a gain in value of $ for coconuts.

The point on the production-possibilities frontier that is economically efficient is the point at which bananas are at:



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