Question 1: The law of diminishing returns produces the _______________ of the production possibilities frontier

Q1) option i)

outward bending PPF

2) ii)

market values

3) true

all point lying on PPF are effecient

4) option ii) false

Production effeciency is when Production occurs at Min of AC

allocative effeciency is P=MC

so Production effeciency doesnt always lead to Allocative effeciency

5) option iii)

a nation produce the good in which it has Comparative ADVANTAGE , & produces the good at lowest opportunity cost

6) option i)

These are positive statements

2 

A) Government can intervene in a variety of ways to minimize the impact of market failure

(i) Tax and Subsidy Policy

Government can impose tax on negative externalities( eg. pollution) to reduce their equilibrium quantity and give subsidy on positive externality( eg. vaccination) to increase their equilibrium quantity.

(ii) Laws and Regulation

Governement may impose legal restrictions on consumption and production of certain goods such as drugs, narcotics and alcholo( age restriction), arms and guns etc.

(iii) Labour Market Regulations

In order to protect the interest of workers arising out of market failure, governemnt may impose minimum wage legislation, or allow formation of trade unions to facilitate greater bargaining power or bring anti-discrimination laws in place.

(iv) Pollution Permits, Property Rights

In order to ensure effecient outcome in an otherwise competitive but ineffecient market, tradeable pollution permits can be granted to firms so effecient outcome can be reached. In additon coase theorem ensures a pareto optimal competitve equilibrium given property rights are well defined.

(ii) Utility and Rationality

Utility, to put simply, is the want satisfying power of a commodity. Various economists have given different approaches to measure utility. Ordinal approach specifies a rank based approach, where commodities are ranked in comparison to one another. Cardinal approach specifies a quantifiabe measurement of utility, where it is mathematically measurable.

Rationality implies, given income of the consumer and price of the good, individuals would choose the option that maximizes their individual satisfaction.

For example, If person A is givena choice between good X and Good Y and the utility function is defined by

U(x,y) = xy, with income = 10, price x = 2, price y = 1

the consumer in an optimal scenario will consume

x = 10/2*2 = 2.5 and y = 10/2*1 = 5 (marshallian demands for a coubb douglas utility function)

(x,y) = (2.5, 5) maximizes the consumer's utility function, and it is optimal because rationality assumes self interest maximization.