COURSE WORK

Course Work

Course Work

Introduction

In the course work several questions will be answered that will cover topics related to the macroeconomics. The macroeconomic topics that will be covered in these questions include the explanation of the production possibility frontier curve in which the marginal rate of substitution and the marginal rate of transformation will be analysed by resolving an algebraic function. The second question will be related to the budget constraints due to tax and its impact on the labour supply and the government spending. The question will be an analysis of the index of industrial production on monthly and yearly basis. A graphical representation will be used to provide the representation of the percentage increase of the index on yearly basis. The fourth question will provide a detail description of the consumer choices regarding leisure and consumption affected by the limitations of the budget. And the fifth question will show the effect on the PPF curve due to increase on government spending. All these questions will help in understanding the concept of Production Possibility Frontier (PPF).

Discussion

The following are the answers of the questions:

a) According to Schotter, (2008, pp.47) marginal rate of substitution is defined as the rate of exchange that would maintain the consumers utility level. It is defined as the rate of exchange which the consumers give up in order to consume another product. When the marginal rate of substitution graph gets steeper this means that the marginal rate of substitution is decreasing. The marginal level of substitution is also defined as the amount of one commodity a consumer would give up in order to get one extra unit of a commodity and bringing no change in the satisfaction level. An indifference curve theory is applicable under which the there are three assumptions regarding the marginal rate of substitution these are: first assumption of the indifference theory regarding the marginal rate of substitution is that it is negative and it is defined that the marginal rate of substitution between to commodities depends upon the consumption of the commodities by a person, second assumption of the indifference theory is the diminishing marginal rate of substitution as consumers give up one commodity against the other so the amount of one commodity decreases therefore changes occur systematically as variation between the two commodities occur. Third assumption of the indifference curve illustrates that the marginal rate of substitution graphs does not intersect and always run parallel to each commodity graph.

The marginal Rate of substitution = U (C, l) = C ^1/2 + L ^ ½

U = C ^ ½ (First Equation)

L ^ 1/2

b) The marginal rate of transformation should be equal to marginal rate of substitution and the marginal rate of transformation is the amount of units that are transferred from producing for example Good B in order to produce more units of Good A. The additional cost that is implemented on producing the extra product is called the marginal cost of good. In a perfect competition situation in the market the ...