What is wrong in an economy when society can transform 1,000 apples into a tent or a tent into 1,000 apples, but the marginal rate of substitution of apples for tents by consumers is 500? Explain how the market automatically will solve this problem.
What will be an ideal response?
When the marginal rate of transformation of apples for tents is 1/1000 and the marginal rate of substitution of apples for tents is 1/500, then the production sector is producing too many tents and not enough apples. Since tents cost 1000 apples but are valued at 500 apples by consumers, the MC of tents is greater than the price, which means that any profit maximizing producer will cut back output of tents. The opposite situation exists with apples so the market will bring about the production of more apples and less tents through the price mechanism until the MRT = MRS.
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What will be an ideal response?
Jacob and Mason go to a diner that sells burritos for $5 and tacos for $3 . They agree to split the lunch bill evenly. Mason chooses a taco. The marginal cost to Jacob of ordering a burrito instead of a taco is
a. $1. b. $2. c. $2.50. d. $3.
The international unit of accounting used by the IMF is the
A. gold standard. B. euro. C. special drawing right. D. dollar.
Classicals argue that an adverse supply shock would
A. raise the natural rate of unemployment, but not the actual rate of unemployment. B. raise neither the natural rate of unemployment nor the actual rate of unemployment. C. raise both the natural rate of unemployment and the actual rate of unemployment. D. raise the actual rate of unemployment, but not the natural rate of unemployment.