Economic Principles: Production Function, Feasible Set, Opportunity Cost, Indifference Curve, MRS and MRT

This document discusses the production function, feasible set, opportunity cost, indifference curve, MRS and MRT in economic principles. It includes exercises and references.

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ECONOMIC PRINCIPLES

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Contents
Exercise......................................................................................................................................3
a).................................................................................................................................................3
b)................................................................................................................................................3
c).................................................................................................................................................3
d)................................................................................................................................................4
e).................................................................................................................................................5
f).................................................................................................................................................5
g)................................................................................................................................................6
h)................................................................................................................................................7
Reference....................................................................................................................................8

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Exercise
a)
The production function of Jane is presented below:
0 2 4 6 8 10 12
0
10
20
30
40
50
60
70
80
90
Production function
Contract
Hours
Contracts
Figure 1: the production function of Jane
(Source: Developed by the learner)
b)
From the table and the figure it is clear that the marginal product of 1st hour is 12 and
marginal product of 10th hour is 3. This is due to the law of diminishing marginal returns
(Brown & Narasimhan, 2019). That means if the input is increased, the product reduces after
a certain point. In this case the product reduces from the first hour as the productivity of Jane
reduces with each hour. Intuitively, Jane may become fatigued with each passing hour which
can reduce the number of contract she reviews at each increasing hour.
c)
The feasible set of Jane is,

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Figure 2: The feasible set of Jane that she can achieve in a day
(Source: Developed by the learner)
d)
If Jane chooses to have free time of 4hrs then she has 6 hrs left to review the contracts.
Now, in 6 hrs, as per the information given in the question she can review 57 contracts in
total. With 10 dollars per contracts, she would earn an income of $570 if she works for 6
hours.
$570>$500
Therefore, it is feasible that she can have a free time of 4 hours and yet earn an income of
$500.

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e)
If she has a free time of 2 hrs she can work for 8 hrs reviewing 68 contracts. Therefore, her
income is=
(68*10)= $680
If she increases the free time to 3 hrs, she can work for 7 hours reviewing 63 contracts. Then
her income becomes=
(63*10) = $630
Thus, opportunity cost of increasing free time from 2 hrs to 3hrs is = $(680-630) = $50.
f)
Suppose the optimal choice of work and free time is 6 hrs and 4 hrs respectively. The figure
below shows the indifference curve corresponding to the choices.
Figure 3: The optimal choice and indifference curve

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(Source: Developed by the learner)
g)
Figure 4: Additional indifference curve below and above optimum
(Source: Developed by the learner)
Now, if Jane is in the green indifference curve, she has an option to increase her utility. At
that point she is working for 4 hours and having a leisure time of 4 hours. She has 2 more
hours left which is being unused by Jane. Therefore she has the option to move into a higher
utility curve (Kolmar & Hoffmann, 2018).
On the other hand, if Jane cannot be in the red indifference curve given the constraint that she
has to spend a total of 10 hours in work and leisure. In that point Jane will have to work for 6
hours and leisure of 6 hours, total of which is more than 10 hours available to her. Hence she
has to come down to a lower utility curve (Bade & Parkin, 2015). Therefore, black utility
curve is the optimal for Jane where utility is maximised and all the hours are utilised.

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h)
The marginal rate of substitution is the slope of the indifference curve where as the marginal
rate of transformation is the slope of the constraint that she has. The marginal rate of
substitution refers to the amount of one good which can be substituted by other in order to
remain in the same utility curve (Kader, 2016). Marginal rate of transformation on the other
hand Jane can decide the substation of leisure with the work or the income. In order to reach
at the highest utility curve achievable, the slope of the constraints and the slope of the
indifference curve at that point need to be equal. In that case of optimal choice, MRS= MRT.

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Reference
Bade, R., & Parkin, M. (2015). Foundations of microeconomics. Pearson.
Brown, C., & Narasimhan, S. (2019). Principles of Macroeconomics. Economics, 2020, 300.
Kader, A. A. (2016). Debilitating and facilitating test anxiety and student motivation and
achievement in principles of microeconomics. International Review of Economics
Education, 23, 40-46.
Kolmar, M., & Hoffmann, M. (2018). Workbook for Principles of Microeconomics. Springer
International Publishing.