On a Certain Island There Are Only Two Goods, Wheat

question 4

Multiple Choice

On a certain island there are only two goods, wheat and milk. The only scarce resource is land. There are 1,000 acres of land. An acre of land will produce either 13 units of milk or 33 units of wheat. Some citizens have lots of land; some have just a little bit. The citizens of the island all have utility functions of the form U(M, W) = MW. At every Pareto optimal allocation,

• A) every consumer's marginal rate of substitution between milk and wheat is -1.
• B) all citizens consume the same commodity bundle.
• C) the number of units of milk produced equals the number of units of wheat produced.
• D) total milk production is 6,500 units.
• E) None of the above is true at every Pareto optimal allocation.

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Definitions:

Compensation

A broad term referring to the combination of salaries, wages, benefits, and other forms of value provided to employees for their services.

Private Bargaining

The process through which individual parties negotiate terms and conditions exclusively among themselves without the intervention of external regulations.

Efficient Outcome

An optimal allocation of resources that results in the highest possible satisfaction or utility with the least waste or inefficiency.

Externality

A consequence of an industrial or commercial activity which affects other parties without this being reflected in market prices.