Question

1. Explain how diversity of individual preferences based on variations in individuals’ marginal rates of substitution gives rise to voluntary exchange and mutual gains from trade.

2.   Discuss the variety of ways in which technological change may affect the relative productivity of capital and labor, the capital or labor intensity of production methods and resulting relative shares of total output distributed to workers and capital owners.

Answer 1

1) The MRS is basically a way of mathematically representing the opportunity cost of getting an additional unit of some good. The MRS only gives the opportunity cost of getting a additional unit of a good.

we have mutual gains from trade if the concepts of opportunity costs manifested in comparative advantages are understood.The opportunity cost of a good A is defined as the amount of another good, i.e. B, that has to be given up in order to produce an additional unit of A. lets take an example of England and Portugal producing wine and cloth.

the opportunity costs of producing wine and cloth in England and Portugal are lower than each other in such a way that England should produce and export cloth to Portugal and the latter should produce and export wine to the former.Portugal has the lower opportunity cost of the two countries in producing wine (0.89 as compared to England's 1.2)' while England has the lower opportunity cost in producing cloth (0.83 as compared to Portugal 1.12). Therefore, Portugal has a comparative advantage in the production of wine and England has a comparative advantage in the production of cloth and both the countries should export to the other country the good in which it has a comparative advantage.this shows marginal rates of substitution gives rise to voluntary exchange and mutual gains from trade.

2)Capital is a factor of production, along with labor and land. It consists of the infrastructure and equipment used to produce goods and services. Capital can include factory buildings, vehicles, plant machinery, and tools used in the production process.increase technology leads to increase in production of goods and services thus, it increase use of machinery which leads to more of capital intensive production and thus more output distributed to capital owner and reduce use labor more technology leads to less use of labor.similarly fall in technology leads to labor intensive production and increase total output distributed to labor.

please upvote if i'm able to help you it means a lot

thank you