Answer to Question #62189 in Microeconomics for Waleed

Question

what is a PPC? And what assumptions are made by drawing it? Why is it generally concave to the origin?
2. What is opportunity set? Explain the opport. Set for a society with a PPC?
3. State and explain the law of diminishing Marginal Utility? How is law of demand related to it?
4. Explain the law of equi-marginal utility and how does it explain consumer's equilibrium?
5. Distinguish between the cordinal utility and ordinal utility?
Which is more realistic?

Answer 1

1. PPC is a graphical representation of possible combination of two goods with constant resources and technology.
2. Opportunity set is the set of all possible portfolios that one may construct from a given set of assets. One may construct both high- and low-risk portfolios from an opportunity set.
3. The law of diminishing marginal utility is a law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
4. The law of equi-marginal utility states that a person can get maximum utility with his given income when it is spent on different commodities in such a way that the marginal utility of money spent on each item is equal.
5. Cardinal utility is the utility wherein the satisfaction derived by the consumers from the consumption of good or service can be measured numerically. Ordinal utility states that the satisfaction which a consumer derives from the consumption of product or service cannot be measured numerically.