3 - Scarcity, work and choice

Question 1

Constrained choice problem

Answer 1

This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce.

Question 2

Scarcity

Answer 2

A good that is valued, and for which there is an opportunity cost of acquiring more.

Question 3

Opportunity cost

Answer 3

When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative.

Question 4

Marginal product

Answer 4

The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant.

Question 5

Indifference curve

Answer 5

A curve of the points which indicate the combinations of goods that provide a given level of utility to the individual.

Question 6

Marginal rate of substitution (MRS)

Answer 6

The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve.

Question 7

Marginal rate of transformation (MRT)

Answer 7

The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier.

Question 8

Feasible set

Answer 8

All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces.

Question 9

Budget constraint

Answer 9

An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one’s budgetary resources.

Question 10

Income effect

Answer 10

The effect that the additional income would have if there were no change in the price or opportunity cost.

Question 11

Substitution effect

Answer 11

The effect that is only due to changes in price or opportunity cost, given the new level of utility.