Unit 3 - Scarcity, work and choice

Question 1

Marginal product

Answer 1

= the increase in output resulting from an increase of one unit of input

Question 2

Diminishing marginal returns

Answer 2

When the marginal product stops increasing and the production function goes flat

Question 3

Diminishing marginal product

Answer 3

An extra unit of input does not yield an increase in output
(an extra hour of study does not increase the percentage grade)

Question 4

Indifference curve - definition

Answer 4

= all the combination of two goods that provide equal utility or satisfaction

Question 5

Indifference curves - characteristics

Answer 5

• downward sloping - due to trade offs
• higher ICs corresponds to higher utility levels
• ICs do not cross
• the slope of the IC - the marginal rate of substitution (MRS)

Question 6

Opportunity cost

Answer 6

= the unavoidable trade-offs in the presence of scarcity
= the value of what you lose when choosing between two or more options

Question 7

The feasible set (PPC) - definition

Answer 7

= any combination of two goods that can be produced given the available resources
- the slope of the feasible frontier - the MRT - the rate at which one of the elements can transform into another one

Question 8

Constrained choice problem

Answer 8

= a decision maker pursues an objective subject to a constraint
example - objective is utility maximization which is constrained by the feasible frontier

Question 9

At which point is utility maximized?

Answer 9

Where MRS = MRT

Question 10

What is the effect of new technology?

Answer 10

• Increased marginal product of labour - workers will value working time more - opportunity cost of free time is higher, therefore greater incentive to work
• Shift in feasible frontier
• Production function is steeper

Question 11

Income effect

Answer 11

Causes - increase in Real income (outward shift in budget constraint)
Income effect - the effect of the additional income if there were no change in the opportunity cost