3.3.2016 Slides - Input Possibilities in Food Production...

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Input Possibilities in Food Production
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The Production Possibility Frontier with Factor Substitution
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Production Possibilities Where on the PPF does the country produce (a llowing factor substitution)? The economy produces at the point that maxim izes the value of production, V. An isovalue line is a line representing a consta nt value of production, V: V = P C Q C + P F Q F where P C and P F are the prices of cloth and food. Slope of isovalue line is ( P C /P F )
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Prices and Production
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Choosing the Mix of Inputs Assume that at any given factor prices, clot h production uses more labor relative to cap ital than food production uses: a LC /a KC > a LF /a KF or L C /K C > L F /K F Production of cloth is relatively labor intens ive, while production of food is relatively la nd intensive. Relative factor demand curve for cloth CC l ies outside that for food FF.
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Factor Prices and Input Choices: Relative Factor Demand Curves
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Factor Prices and Goods Prices In competitive markets, the price of a good shoul d equal its cost of production, which depends on the factor prices. How changes in the wage and rent affect the cost of producing a good depends on the mix of facto rs used. An increase in the rental rate of capital should affect t he price of food more than the price of cloth since foo d is the capital intensive industry. Changes in w/r are tied to changes in P C /P W .
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Factor Prices and Goods Prices
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From Goods Prices to Input Choices
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Factor Prices and Goods Prices An increase in the relative price of cloth, P C /P F , is predicted to raise income of workers relative to that of capital owners, w/r . raise the ratio of capital to labor services, K/L , us ed in both industries. raise the real income (purchasing power) of wor kers and lower the real income of capital owners .
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Factor Prices and Goods Prices Stolper-Samuelson theorem : If the relative pri
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