marginal rate of transformation of public for private good).
Equation 13, the domestic
marginal rate of transformation, suggests subsidizing the learning manufacturing sector.
With the
marginal rate of transformation independent of z (from [14]), it is not possible for the marginal rate of substitution to be equated to the
marginal rate of transformation for all combinations of [z.sub.0], [z.sub.1] unless there is efficiency within each sector.
From your view of the transmission mechanism of monetary policy, find your
marginal rate of transformation between the target variables.
For example, in an economy with Samuelsonian public goods (see Samuelson, 1954), Pareto optimality requires that the sum of the marginal rates of substitution of public for private goods be equal to the
marginal rate of transformation of public for private goods, thereby implying that marginal rates of substitution of public for private goods will not be equal among consumers.
At the same time, the supply curve for apples ([S.sub.a]) represents the
marginal rate of transformation of apples for oranges ([MRT.sub.ao]) at any particular level of production.
Given a market interest rate and assuming the borrowing rate is the same as the lending rate, every utility- and wealth-maximizing individual will equate the marginal rate of substitution between present and future consumption with the interest rate, which equals the
marginal rate of transformation for productive investment [Copeland and Weston, 1983].
