Question

PART A (30 %): PART A requires the student to provide a definition and brief explanation in essay form of the importance of the following concepts for the understanding of micro- economics

1. MRTS_L,K > P_L/P_K;
2. ICC;
3. Engel Curve and Inferior Good;
4. Decreasing Returns to Scale.

Answer 1

When MRTS>PL/Pk, it means producer is not at equilibrium and it is beneficial for the firm to produce more labor and less capital

ICC- income consumption curve is the locus of consumer equilibrium point with different income level. It represent the optimality point for various income level

engel curve- it shows how consumption of good 1 varies with respect to income

Inferior good are those goods whose consumption decreases as income increases. In economic term, good with negative substitution effect and positive income effect where substitution effect dominates income effect.

Decreasing return to scale exist when proportionate change in output is less than proportionate Change in input.