Question

Two of the statements describe productive efficiency, two describe allocative efficiency, and the remaining two statements describe neither productive efficiency nor allocative efficiency. Classify each statement as describing productive efficiency, allocative efficiency, or not efficient.
1. Product efficiency:
To produce one more bagel, the output of donuts must fall. If Herb Farmer wants to produce one more cake, he needs to give up two loaves of bread.
2. Allocative efficiency:
Flour, which can be used to make many products, is used to make waffles and muffins because of the high demand for each product. Herb Farmer decides to use his flour and sugar to make three cakes and three loaves of bread, which his customers have demanded.
3. Not efficient:
Her Farmer makes two cakes and two loaves of bread, but uses enough flour to make three cakes and four loaves of bread. Herb Farmer decides to use his ingredients to make cakes, but his customers prefer donuts.

Answer 1

Answer:

Productive Efficiency refers to the point where an entity is utilizing all of its resources in production such that if it wishes to produce one more unit of a good it would have to give up equivalent units of another good.

Allocative efficiency refers to resources being used to produce goods that are in demand such that the resources in the economy goes to products that are needed by the people and therefore benefits both the consumers and the producers who make more money selling said products.

Productive Efficiency

• To produce one more bagel, the output of donuts must fall.
• If Herb Farmer wants to produce one more cake, he needs to give up two loaves of bread.

Allocative Efficiency

• Flour, which can be used to make many products, is used to make waffles and muffins because of the high demand for each product.
• Herb Farmer decides to use his flour and sugar to make three cakes and three loaves of bread, which his customers have demanded.

Not Efficient

• Herb Farmer makes two cakes and two loaves of bread, but uses enough flour to make three cakes and four loaves of bread. - Not efficient as there was wastage with the flour.
• Herb Farmer decides to use his ingredients to make cakes, but his customers prefer donuts. - Goes against Allocative efficiency.