Hermione and Ron are at a sweet shop in London. Hermione looks at the prices of ice cream and chocolate bars and says to Ron: "I can tell you what your marginal rate of substitution between ice cream and chocolate bars is at your best affordable
point." "No, you can't," says Ron. "You don't know my preferences and how much money I have." "I don't need to know all this because I know the prices," Hermione replies. Is she right? Explain.
Yes, Hermione is correct. All information she needs is the relative price of ice cream in terms of chocolate bars (or vice versa), which determines the slope of Ron's budget line. The marginal rate of substitution at Ron's best affordable point is the slope of his indifference curve at this point. But because the best affordable point is the point where the budget line is tangent to the highest attainable indifference curve, the slope of the indifference curve at this point equals the slope of the budget line. So if Hermione knows the relative price, she knows the slope of Ron's budget line. Then she also knows the slope of his indifference curve at the best affordable point, which is the marginal rate of substitution at this point.
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The central macroeconomic concept that is most clearly related to changes in the well-being of the average member of the economy is the
A) unemployment rate. B) inflation rate. C) productivity growth rate. D) None of the above is closely related.
Which of the following is responsible for the distribution of paper currency in the United States?
A) the U.S. Treasury B) the Office of the Comptroller of the currency C) the Federal Reserve D) all of the above
If injections are greater than withdrawals:
a) National income is likely to increase b) National income is likely todecrease c) National income will stay in equilibrium d) Prices will fall
Even though the efficient use of resources enhances social welfare, it may not always be optimal from society's perspective. Why is this statement true?
a. Efficiency leads to lower per unit costs; thus, promoting any method of cost control increases efficiency. b. The ethical use of resources can be just as important as their efficient use. c. If market action does not result in an efficient outcome, government action can always improve the outcome. d. Efficient outcomes sometimes waste resources. e. Markets always reward efficiency, even if there is only one firm in it.