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Production Possibility Frontier

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Questions and Answers

What happens to the utility of consumer A and B as we move from a to b to c?

Utility of consumer A increases, while that of B decreases.

What is the significance of the points along the utility possibility frontier (UPF)?

All points along the UPF are Pareto efficient.

What is the condition for welfare to increase according to the Pareto criterion?

If it is possible to increase the utility of one individual without decreasing the utility of the other.

What is the limitation of the Pareto criterion?

It avoids interpersonal comparisons of utility. Signup and view all the answers

What is the principle behind the Kaldor-Hicks criterion?

The compensation principle, which states that a change is an improvement if those who gain can fully compensate the losers and still retain some gain. Signup and view all the answers

Why is the Kaldor-Hicks criterion used?

To overcome the limitation of the Pareto criterion. Signup and view all the answers

What happens to the utility of individual B when moving from point Q to a on the UPF?

The utility of individual B increases. Signup and view all the answers

What happens to the utility of individual A when moving from point Q to c on the UPF?

The utility of individual A increases. Signup and view all the answers

What is the significance of point Q on the UPF?

It is a point inside the UPF, indicating that there is room for improvement. Signup and view all the answers

What is the utility possibility frontier (UPF)?

A graphical representation of the utility of two individuals. Signup and view all the answers