sem 2 MCQ

marginal rate of transformation (MRT) of goods from future to present (borrowing now to spend later)

(1 + r )

to have1 unit of the good now you have to give up (1 + r) goods in the future

slope of feasible frontier

marginal rate of substitution (MRS) of goods from future to present (borrowing now to spend later)

(1+p)

slope of indifference curve

equation for break-even price of buying a financial contract

present value = future value / (1 + IR)

the present value of these payments depends negatively on the interest rate

• if IR increases present value decreases

shape of indifference curve to represent a consumer’s preference between consuming now and consuming later

bowed towards the origin as a consequence of diminishing marginal returns

• indifference curve would be linear if borrower didn’t experience diminishing marginal returns

more impatience → higher MRS

pure impatience → MRS > 1

net utility per hour of working

= hourly wage - disutility of effort per hour

total employment rent

= employment rent per hour x expected lost hours of work

employment rent per hour

= wage - disutility of effort - reservation wage

best response function (effort when offered a wage)

the curve increases with wage

concave → as the level of effort increases the slope decreases

higher wages can elicit higher effort but with diminishing returns

frontier of the feasible set of combinations of wages and effort the firm can get from its employees

the slope of the best response curve

MRT of wages into effort

isocost (for effort) for the firm

every point on the isocost line e/w is the same

slope of isocost = e/w = MRS

steeper line (higher e/w) → lower cost of effort

flatter line (lower e/w) → higher cost of effort

participation rate

labour force / population of working age

employment rate

number of employed / population of working age

unemployment rate

number of unemployed / labour force

wage setting curve

the curve that gives the real wage necessary at each level of employment to provide workers with incentives to work hard and well

price setting curve

gives the real wage paid when firms choose their profit maximising price

Equation of price setting curve = w/p =𝜆−𝜆𝜇

when 𝜆 = 1 equation for price setting curve = (1- 𝜇)

what determines the height of the price setting curve

𝜆 = labour productivity = average output per hour

𝜇 = markup → if competition in the market is higher the the markup will be lower

labour market equilibrium

where the wage setting curve and price setting curve intersect

Nash equilibrium

maximum someone can spend in period 1 (with no income period 1 and income in period 2)

= income / (1 + IR)

maximum someone can spend in period 2 (with no income period 1 and income in period 2)

= income - (loan + interest)

max borrow in period 1 (with no income period 1 and income period 2)

= endowment - period 2 spend / (1 + IR)

max spend period 2 (with no income period 1 and income period 2)

= endowment - (amount borrowed period 1 x (1 + IR))

slope of isoprofit curve (at a given point)

(price - wage) / quantity

also MRS

markup equation (when average product of labour = 1)

(price - wage) / price