Feasible Frontier Flashcards
What does the feasible frontier show?
The maximum output that can be achieved with any given amount of input
What is a feasible set?
Any area underneath the feasible frontier
What is the marginal rate of transformation and what does it represent?
The slope of the feasible frontier, and it represents the trade-offs faced by the decision-maker
What is a constrained choice problem?
A model of how individuals choose when considering their personal preferences
What is the utility maximising choice?
A choice where the amount of one good traded for the other is equal to the amount of one good that the individual is willing to trade for the amount of the other good
When on the feasible frontier does the utility-maximising choice occur?
When MRS=MRT, or when the feasible frontier has the same gradient as the indifference curve at the point of higher utility
What happened to the production function when technology is improved?
The production function is shifted upwards as production increases
What are budget constraints?
The feasible frontier for consumption choices
Where is the optimal choice for wages found on a graph?
Where the slope of the indifference curve (MRS) equals the wage (MRT)
What are the two effects that a wage increase will have?
Income effect
Substitution effect
What is the income effect?
Rise of wages causes a decrease in working hours to balance out the total income and keep it the same as before the rise in wages
What is the substitution effect?
When a rise in wages leads to an increase in hours worked, as the opportunity cost of hours spent not working increases
