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The Shape of Economic Possibility
In a model of interaction between a landowner and a worker, the set of all economically feasible outcomes is often represented as a lens-shaped area. This area is bounded above by a concave 'feasible production frontier' and below by a convex 'reservation indifference curve'. Explain why both of these boundaries are necessary to define the set of all possible voluntary agreements.
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The Herder's Dilemma
Consider a model of interaction between a landowner and a farmer. A graph shows the farmer's free time on the horizontal axis and grain output on the vertical axis. The graph includes two key curves: a downward-sloping 'feasible frontier' representing the maximum technically possible grain output for any amount of free time, and a convex 'reservation indifference curve' representing the minimum combinations of grain and free time the farmer is willing to accept. The 'feasible set' consists of all allocations that are both technically possible and acceptable to the farmer. Which of the following points describes an allocation that is inside this feasible set?
In a model of interaction between a landowner and a worker, a graph shows the worker's free time on the horizontal axis and grain output on the vertical axis. The graph includes a downward-sloping 'feasible frontier' (representing the maximum technically possible output) and the worker's convex 'reservation indifference curve' (representing the minimum combinations of grain and free time the worker will accept). The 'feasible set' includes all allocations that are both technically possible and acceptable to the worker. Why is an allocation that is located below the feasible frontier but also below the worker's reservation indifference curve excluded from this feasible set?
In a model of interaction between a landowner and a worker, any allocation of free time and grain that is technically possible (that is, located on or below the feasible production frontier) is also part of the economically feasible set of outcomes.
In a model of interaction between a landowner and a worker, any allocation of free time and grain that is technically possible (that is, located on or below the feasible production frontier) is also part of the economically feasible set of outcomes.
Defining the Boundaries of Economic Possibility
In a model of interaction between a landowner and a worker, the 'feasible set' represents all the combinations of grain and free time that are both technically possible and acceptable to the worker. The lower boundary of this set is defined by the worker's 'reservation indifference curve,' which shows the minimum outcomes the worker is willing to accept. If the worker's outside option improves (for example, due to a new government program providing a basic income), how does this change affect the feasible set of allocations?
In a model depicting the interaction between a landowner and a landless farmer, the set of all possible agreements is bounded by two curves: the feasible production frontier (representing technical limits) and the farmer's reservation indifference curve (representing the farmer's minimum acceptable outcome). What is the economic significance of the points where these two curves intersect?
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The Shape of Economic Possibility