Milk costs $2 and the last unit provides $4 in marginal utility. Cheese costs $4 and the last unit provides $2 in marginal utility. Is this an efficient allocation of resources? If so, why? If not, why not?
What will be an ideal response?
Allocation is inefficient. Milk is providing more MU per dollar spent than cheese. More resources should go into milk production and less to cheese. With more milk consumption, MU of milk will decrease, while with less cheese consumption, MU of cheese will increase. At equilibrium, perhaps milk’s MU will drop to $1.50, while cheese’s will rise to $3. Then the ratio of MU/P = 0.75 for both goods.
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