What is allocative efficiency and how does it relate to the ...

[azncindy619]

What is allocative efficiency and how does it relate to the production possibilities frontier?
 
  What will be an ideal response?

Question 2

Refer to Figure 19-8. The equilibrium exchange rate is at A, 1.25/euro. Suppose the European Central Bank pegs its currency at 1.00/euro. At the pegged exchange rate,
 
  A) there is a surplus of euros equal to 700 million. B) there is a shortage of euros equal to 500 million.
  C) there is a shortage of euros equal to 200 million. D) there is a surplus of euros equal to 300 million.

[peilian]

Answer to Question 1

Production efficiency occurs when production takes place at a point on the PPF. This indicates that all available resources are being used for production and society cannot produce additional units of one good or service without reducing the output of another good or service. Allocative efficiency, however, requires that the goods and services produced are those that provide the greatest possible benefit. This definition means that the allocative efficient level of output is the point on the PPF (and hence is a production efficient point) for which the marginal benefit equals the marginal cost.

Answer to Question 2

B