Question:
MRTS is equal to the ratio of marginal products of two inputs. I'm having a hard time understanding the intuition behind the formula.

For example, I am looking at the MRTS of good b for a. Thus, MRTS = marginal product of a / marginal product of b.

Let's say that good a is very productive with a high marginal product, while good b is unproductive and has a low marginal product. This means that the MRTS of good b for a is very high. Thus, a lot of input a must be reduced for a 1 unit increase in input b, to maintain the same level of output.

This conclusion does not make sense to me since I thought that input a was very productive. How come when we increase the unproductive input by 1 unit, we have to reduce a lot of the productive input in order to maintain the same level of output?

The question is based on the definition of the MRTS of B for A as the (the amount of input A)/(the amount of input B), which is flipping the numerator and the denominator of the correct definition, probably because of the definition of...

Question:
I have been reading Michael M. Alba's "Why has the Philippines Remained a Poor Country" and in it he mentioned that the Philippines is nearing its steady-state level of output per worker and that the convergence point is lower than advanced economies. Could you please explain to me what steady-state level of output means and why is it bad in context?

Steady-state level of output per worker is roughly the same as per capita income in the long run. There is nothing good or bad about it, except countries and their residents enjoy higher standards of living in a material sense if the per capita...

Question:
I have come across a number of articles that test on the Kuznets curve. They are using GDP and log squared GDP as independent variables for their research. I just don't get why they have to create a brand new independent variable that is the "log squared GDP." What is the purpose of this? Why cant I just interpret from the GDP value itself? For example: GDP coefficient is negative, I would just interpret it as a negative relationship between inequality and GDP. Why the addition of log squared GDP?

There are several statistical reasons why you would covert the variable into a logarithm. Logarithm transformation, for example, can change a highly skewed variable into a more normalized distribution. It is also useful when you wish to linearize...

Question:
I understand that inflation occurs when demand for commodities far exceeds supply (like now) and that the Fed typically raises interest rates to lessen overall demand and reduce/control inflation. This approach seems focused on addressing demand, but does it also affect supply? Businesses want to expand their capacity to meet higher demand and typically need capital to do that. Does the policy of increasing rates ultimately limit businesses ability to expand further hindering their ability to meet demand? Wouldn't be better if we lent more aggressively to businesses so that they could increase capacity rather than reducing demand?

Standard theory describes channels through which raising rates affects both demand and supply.  Higher rates raise the opportunity cost of spending and thus tend to dampen both business investment and household consumption.  All else...

Question:
Hello, I'm in the 8th grade in Ontario's Gifted Enrichment Program. I am researching for my Independent Study Project which I chose to be about space. My question is, "In your opinion, considering the current issues on Earth, should we be spending money on space exploration? If so, should we be spending more or less money than we already are?"

I should be clear that economics cannot provide an answer, but it can help us to organize our thoughts about an answer. The economic concept that is most helpful in thinking about this question is "opportunity cost." That is, the best way to...

Question:
I'm writing a book about a solution to high medical costs. The government makes it legal to disregard all copyright and patents for all things medical i.e., EpiPens, prescriptions, and pacers, until healthcare providers and health insurances make prices affordable. In my story, bootleg healthcare is already prevalent. Besides this being an extreme solution, does this solution seem plausible or is there something I don't know about that would make it impossible for this solution to work?

Interesting idea.  As you note, the idea is extreme, but it addresses some of the underlying causes of high healthcare prices.

Your reasoning likely was that cost reduction for the healthcare providers would lead to price...

Question:
If a company wishes to invest in new equipment as technology demands, should they not to the capital markets to raise those funds? Is it moral to have their customers to pay for such equipment by raising customer fees & rates. By having customers pay for the cost of new capital equipment, it allows the companies shares to rise in value, which enriches share holders. Is this the way the business world operates ?

You ask, “Is it moral to have their customers pay” by raising prices? Well, let’s ask it this way. Assuming the quality of the product increases because of the investment in the new technology, are customers willing to pay higher prices after the...

Question:
On the most recent test in my AP Economics class, there was a multiple-choice question about "What is true when comparing accounting and economic profit?"

I chose the answer that said "Accounting profit is greater than economic profit" because I am under the assumption that there is always an opportunity cost no matter the situation ("No Free Lunch"). However, when I got my test results back, I found that the supposedly correct answer is "Accounting profit is greater than or equal to economic profit." When I asked my teacher about this question, he said that hypothetically in economics there are situations with no opportunity cost.

So my question is: What do you think is the correct answer to this question? In economics, is there ever theoretically a situation where there is no opportunity cost?

Great question. First off, when we’re talking about a firm, be careful with what you label economic (or opportunity) costs: they are the sum of implicit and explicit costs. Accounting and economic cost both consider explicit costs (things like...

Question:
Was corporation efforts to limit competition (healthcare drug maker practices, etc.) considered within the original, or current, evaluation of free-market equilibrium? It seems like the free-market theory diminishes when such practices are in place and competition is limited through things other than efficiency, ingenuity, capital, etc., such as lobbying government or organizations to limit entry to a market through regulations rather than competition. I'm not well read on Adam Smith. Did he consider such limits to the "free" in free markets?

You are correct in observing that efforts to limit competition have the potential to produce market outcomes that diverge from the "free market ideal" that economists commonly use as their baseline of comparison. Indeed the desirable properties...

Question:
So I wanna make a currency/small economy in my school and I need to figure out how to make it have value, without it being made from something with preexisting value (such as precious metals being used as a currency). I know how to distribute the money but I don't know how to create a value for it.

I know you are asking this out of intellectual curiosity and for fun; in the U.S., it is illegal to create any sort of currency. Having said that, you raise an important point. It is easy to "create money" by printing some pieces of paper and,...

Question:
At the time of this question, the Atlanta Braves baseball team is one of the "only" publicly traded teams. At the beginning of the season, their stock price was about \$29. Right now, they are one game away from going to the World Series and their stock price has dropped to \$26. When a baseball team goes to the playoffs, they receive more revenue in ticket sales, concession and so forth. The Texas Rangers generate about \$13,000 a night in sales tax alone for the city of Arlington when it packs the stadium. THAT IS JUST SALES TAX! So when a team goes to the playoffs, their pocketbooks get bolstered. So why did their stock go down in price, since the team obviously has more liquid assets in their accounts and they get placed in a better position for next year's trades?

Interesting question. The Braves defeated the Dodgers on Oct. 20 (2021) to take a 3-1 game lead in the National League Championship Series and are now just one game away from the World Series. Liberty Media Corporation is an American mass media...

Question:
I'm wondering if you could provide insights in, or criticism of, Simon abundance index. A friend recently told me about it and I was very surprised not to find anything on it other than stuff written by the people who built it.

On top of this strange confidentiality of the index, as well as the surprise at "no resource scarcity, we're actually improving", I have a few other reservations.
What it says about resources being virtually unlimited leads me to compare it with that math paradox of the arrow that always covers half of the remaining distance, infinitely, instead of touching the target -the Earth being limited, at some point I think we'd run out even if we optimized our consumption to the molecular level. It also takes into account the richest 10% when trying to show that the average work time needed to buy some basic items across the world has lessened, so we're going better with a bigger population, which doesn't look fair. I also know that among animals, large populations collapse after a while due to lack of resources -but they say it doesn't account for humans resourcefulness (could be a "not for us" bias, but could also be relevant).

Your observation about the lack of material on the Simon Abundance Index is a valid one. Perhaps its newness accounts for a general lack of peer-reviewed material on the subject.

The Simon Abundance Index emanates from the ideas and work...

Question:
Other than looking at the ISU farm rental rate by county, Louisa County only had a few reported rates, where else can I look?

There are very few places to find county-level farm rental rate information. Iowa State has conducted a long-running survey on farm rental rates. That data is provided in the ISU Cash Rental Rate Map (...

Question:
I am currently a student studying economics and run my own small business. How can studying economics apply to my small business? How does economics relate to small businesses in general? Thank you!

Small business owners who most effectively use economics knowledge to the advantage of their business do so through the lens of unit economics. What are the per-unit expenses of the business and how do those expenses compare to revenues per unit...

Question:
Is there a strong correlation between starting salaries for entry-level software engineers and the institution they matriculated from? For example, one may expect that an individual graduating from Stanford would have a much higher starting salary than, say, the University of North Dakota. Or does the low supply of labor and high demand off-set any gain an individual may experience from matriculating from a top institution? (especially when considering a relatively higher expected cost for that top institution). In other words, does it really pay to go to a large or highly selective engineering school because of the higher starting salary? (I'm assuming a higher salary, in this case).

John Green, Nicole Swepson, and I recently completed a paper, College Quality as Revealed by Willingness-to-Pay for College Graduates, that addresses this question.  First, we examined the correlation between traditional measures of...

Question:
I'm currently a student and considering pivoting majors to economics, as it's a field I have some interest in, but I can't figure out what actually happens on the job. What does a typical day on the job look like?

You can do a lot of different things with an economics degree so it's a bit of a tough question to answer. Of course, one thing you can do is be an economist. The Bureau of Labor Statistics has an overview of what that kind of position entails...

Question:
I have a question about the economic term “pricing power.” The term pricing power is often used to describe companies that successfully command big premiums for their products, like Apple. Can companies that compete solely on price have pricing power? For example, Wal-Mart charges lower prices than its competition because of its superior cost structure. Does Wal-Mart have pricing power?

A seller has market power if it is able to PROFITABLY price higher than the competitive price because it has a downward sloping demand curve and sets its output where marginal revenue equals marginal cost but sets its price above its marginal...

Question:
I am trying to find information to resolve an issue in our household. Basically, I had this idea about a fair sharing of expenses in a household, more specifically a couple with kids. It is known that one traditional way of managing a family's income is putting it together in a pot and making decisions together. However, it seems odd to me that someone earning 30K should have a 50% vote on what to do with the money, especially if the earning for the family are in the 400K range. So I thought that each one of us could have a private amount of money, aside from this main shared family one. Then each one of us could participate in the shared expenses according to their level of income in the family. So if I earn 93K a year and my wife 7K a year I think that she should contribute to 7% of all the agreed family spending and me 93%. The remaining part is her discretionary saved amount.

There seems to be two questions here.

1. For a couple with kids and highly unequal incomes, what is the best way to make expenditure decisions? (Do both individuals get equal votes? Would that be unfair to the higher-earning individual...
Question:
In November 2020, India's oil basket price was 65\$, WPI 2%, CPI 6.8%. In June 2021, India's oil basket was 70\$, CPI almost the same 6.2%, but WPI soared to 12.2%. How is it possible? What can be the factors for a sudden increase in WPI when oil prices are almost the same and CPI is still the same?

Let's recall that inflation is usually computed as a year-on-year (annual) percentage change in the consumer price index. Therefore, CPI inflation for June 2021 will compare the CPI in June 2021 to the CPI in June 2020. Hence, inflation of say 6....

Question:
When we talk about interest rates, theoretically we say that lower interest rates lead to higher investment, thus higher GDP. My question is, using data from World Bank or other institution, what sort of interest rate should we consider (there are many of them, deposit interest rate, reference interest rate) and theoretically seems not to be well specified. For instance, in regression analysis, if we want to compute the impact of interest rate to GDP, what kind of rate are we paying most attention to while using data?

As is usually the case in economics and economic data analysis, the answer is "it depends."

From a theoretical standpoint "The" interest rate is not really something that exists in the real world, it is more of a conceptual tool that...

Question:
When speaking of a dominant market position in economics, people usually only think about the abuse of a dominant market position. I decided to look for some answers to see if a dominant market position is acceptable, but I couldn't find anything. My question is: Can you give an example of when a dominant market position is acceptable?

My short answer from ten years ago: When consumers are made better off in the short and long run.

My short answer today: That’s a toughie.

My long answer:  You have actually hit on a question...

Question:
I haven't been able to find any information on this, so I hope you can help. It seems to me that corporate taxes are the worst kind of regressive tax and that corporations do not actually pay any tax, per se - we pay it for them. Corporations get all monies for taxes from the goods they sell. So the people buying those goods actually pay the tax, indirectly. The most obvious example I can think of is a gas tax. For every penny the state raises the gas tax, the price of gas goes up by that amount. It just happened recently here in New Jersey. People are driving less, so less tax revenue. NJ raises the gas tax to compensate and gas prices went up accordingly. And the people who can least afford it are forced to pay more for gas. Doesn't impact the millionaires - they won't even notice. Doesn't impact the corporation - their profit remains the same. Corporate taxes in this country (USA) remind me of the VAT in Europe. Same thing, but at least they are honest about it. We seem to like to live in this delusion that corporations are creating money out of thin air (only the Fed can do that) and so they need to be taxed more. It's amazingly popular, especially at election time. On the other side, if a business can not raise their prices because of market pressure, they end up going out of business. So what am I missing?

You have described an economic concept called tax incidence. There is a wealth of studies centered around this in the field of public finance. The basic question, similar to what you have articulated, is who bears how much tax burden? There is...

Question:
How do I decide a particular field to focus on under economic careers ? Also what does an economist do in an insurance firm?

With a major in Economics, one does NOT need to decide on a specific career field until they graduate when they likely will have multiple options to choose from.  The Econ degree will prepare graduates for various career paths, even if the...

Question:
Whenever a country signs up to an IMF package, there is a sudden increase in inflation which is difficult to control. My question is why does that occur? Secondly, what is an anti-inflationary monetary policy and how does that contribute to inflation of basic goods (petrol, rice, sugar, etc.)