Decision Making and Scarcity

3.5 of The Economy 1.0 & The Economy #2

Which point would Jason choose when combining his feasible frontier and his indifference curve? And why

-None of IC₄ is accessible to Jason’s frontier, so we can ignore it

-IC₁ and IC₂ are within, but they both go into Jason’s feasible set, so he can always do better. There is no point sticking with point B when point D is also feasible and gives a higher level of utility

-Thus, point E represents the optimal point - where he can maximise his utility given his feasible frontier

What is the core property that occurs at the optimal point of allocation

-The slope of the indifference curve is the same as the slope of the feasible frontier.

-Thus, the two trade-offs are balanced / at equilibrium

Why does the optimal allocation has the MRT = MRS?

-Should the MRS > MRT, the number of good A one is willing to trade for exceeds the opportunity cost of doing so.

-Should the MRT > MRS, the number of good A being made exceeds the willingness to consume good A

What is a constrained choice problem? And what is the solution?

-A problem is about how we can do the best for ourselves, given our preferences, constraints, and when the things we value are scarce.

-The solution comes from the individual’s optimal choice, which comes about when MRS = MRT