Explain each of the following topics or terms with examples when specified. Part A: Isocost and Isoquant. 1 Mark Measures the quantity that two factors of production can make. The... Explain each of the following topics or terms with examples when specified. Part A: Isocost and Isoquant. 1 Mark Measures the quantity that two factors of production can make. The isocost is the trade off for price similar to a budget line. 1 Mark It shows how many units of each factor (normally labour and capital) can be purchased / employed. 2 mark The isoquant is similar to an indifference curve but instead of showing different ways to generate the same level of happiness it works out the different ways to show how to produce the same level of output. 1 Mark This is used to find the long run paths as well if we consider higher budgets over time. Creating the long run expansion path. Part B: Extensive form games with an example. 1 Mark Games played in sequence. One person moves then the next person moves and so on. 1 Mark What becomes important is what do people know now when they move. 1 Mark This information includes who has moved before them and what have they done. 1 Mark Examples would be Stackelberg leader or firm entry. 1 Mark This is in comparison to normal form games where information is not updated and everyone moves at the same time. Part C: The indifference curve for two goods that are perfect substitutes, explain in words with an example diagram. 1 Mark Straight line downward sloping explains what the trade off is in utility is. 1 Mark Show that the crossing points is when they just get one of the goods to create that utility. 1 Mark Due to the indifference curve being a straight line and budget curves being a straight line the optimal allocation is generally a corner solution where only one good is consumed. 2 Marks for diagram. Part D: budget line including an explanation of its two axis crossing points and the slope. 2 Mark Straight line, crossing points are the maximum amount that can be afforded if all spending goes on that good. (5 Marks) (5 Marks) (5 Marks) (5 Marks) 1 Mark So it is the budget divided by price of that good. The slope of the curve is the price trade off. 2 Mark Anything below the curve is feasible but due to the logic that more is better we generally assume that this line will be a binding constraint unless there is a second constraint (e.g. time). Part E: Asymmetric information. 1 Mark When one side of a deal has more information than the other. Shown in the market for lemons. 1 Mark The key consideration is if and when the lack of information leads to worse outcomes and why. 2 Marks Often it is not the initial manipulation of this information that damages the whole market this is often just a transfer without a loss to the market (we can still view this as bad but it can be solved with other policies) it is normally the person who lacks information assuming they will be manipulated and therefore react to this that damages the market / losses trade. 1 Mark That in the market for lemons complete information and complete misinformation end up with the same outcome it is only asymmetric information that leads to a worse outcome. Read more