Week 5

Question 1

Define the marginal rate of transformation

Answer 1

How many units of good X have to stop being produced, to produce a unit of good Y.

Think of it as the gradient if a tangent at any point on a PPF curve.

Question 2

What is an opportunity cost?

Answer 2

The potential benefits that are missed out by chosing to allocate resources in a specific way.

Question 3

What is a PPF curve used for?

Answer 3

A Production Possibility Frontier curve is used to ilustrate scaricty and choice.
It shows all the different combinations of output of two goods that can be produced using available resources.

Question 4

A concaved PPF curve indicates the….

Answer 4

law of increasing opportunity cost

Question 5

A linear PPF curve indicates….

Answer 5

Constant opportunity cost

Question 6

A firm producing at any point on the PPF curve is…

Answer 6

Productively efficient as they are using all factors of production to a maximum level.

Question 7

What does a constant MRT mean?

Answer 7

A constant opportunity cost

Question 8

What does an increasing MRT mean?

Answer 8

An increasing opportunity cost

Question 9

What is the marginal rate of substitution? How do you calculate it between 2 points on an indifference curve?

Answer 9

Draw a tangent line between the two points and calculate the gradient of the slope: Rise/Run

Question 10

Why does the indifference curve get flatter?

Answer 10

Because of the diminishing marginal returns of consumption

Question 11

In the example of Alexis and his free time / study time and grade points, what is the marginal rate of substitution?

Answer 11

The number of grade points he is willing to sacrifice in exchange for more free time

Question 12

If there are multiple dominating technologies, which would a firm choose?

Answer 12

We operate under the assumption that firms aim to maximise profits, therefore produce the good for the lowest possible cost.

It would then depend on the cost of labour compared to the cost of the input materials

Question 13

Explain the following equation c = w(24-t)

Answer 13

Consumption = wage X (24hrs in a day - free time)

Question 14

WHat is a feasible set and the feasible frontier?

Answer 14

The feasible set refers to any combination of Consumption spending / Hours of free time that are actually possible

The feasible frontier refers to the limit of either, I.E the line or the budget constraint

Question 15

In the student example; free time, study time and resulting grade points…what is the difference between the MRS and the MRT?

Answer 15

MRS = The number of grade points the student is willing to sacrifice in order to gain free time

MRT = The rate at which the student can actually turn free time into study time, which is confined by a budget restraint such as time

Question 16

Where are the MRT and MRS on a diagram?

Answer 16

MRT = the slope of the feasible frontier

MRS = the slope of the indifference curve

Question 17

What occurs where MRT = MRS?

Answer 17

This is the utility maximising point, where the indifference curve meets the feasible frontier.

Question 18

If wages increase, what is the income effect and substitution effect of these things occurring? Non-economic terms

Answer 18

Income effect = If I work the same amount of hours or more, my income will increase

Substitution effect = Now, every hour I spend as free time becomes MORE EXPENSIVE as my wages have risen