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Lecture 26

# Lecture 26 - Chapter 20 Trading with the world Final exam...

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1 Final exam: 8:00 a.m., Wed, March 19 Cannot leave exam room until exam is handed in. No one will be allowed to start exam after some exams are handed in. Please don’t hand in exam before 9:00 a.m. Please don’t arrive for exam after 8:30 a.m. Office hours next week: Tuesday, March 18, 1:30-2:30 p.m. in Seq 231 Chapter 20: Trading with the world A. The production possibilities frontier 1. The two-worker production possibilities frontier 2. The three-worker production possibilities frontier coffee (pounds/ year) computers (number/year) Brazil’s production possibilities frontier 20,000 A all 3 only produce coffee Maria produces some computers, some coffee Carlos and Pedro produce only coffee; abs value of slope of PPF = Maria’s OC = 50 15,000 100 5,000 250 Maria produces only computers Pedro produces some computers, some coffee Carlos produces only coffee abs value of slope of PPF = Pedro’s OC = 67 300 Maria and Pedro produce only computers Carlos produces some of each abs value of slope of PPF = Carlos’s OC = 100 Chapter 20: Trading with the World A. The production possibilities frontier 1. The two-worker production possibilities frontier 2. The three-worker production possibilities frontier 3. The production possibilities frontier with many workers

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2 Production Possibilities Curve for a Many-Worker Economy Computers (number/year) Coffee (pounds/year) here resources with high OC are used to make computers (slope is steep) here resources with low OC are used to make computers (slope is relatively flat) Notice production possibilities frontier gets steeper as we move to the right This represents fact that for efficient production plan, resources with lowest opportunity cost of producing computers are used to make the first computers As more and more computers are made, there will be an increasing opportunity cost (steeper slope) This bow shape (concave) is called the principle of increasing opportunity cost Production Possibilities Curve for a Many-Worker Economy Computers (number/year) Coffee (pounds/year) here resources with high OC are used to make computers (slope is steep) here resources with low OC are used to make computers (slope is relatively flat) Chapter 20: Trading with the World A. The production possibilities frontier B. Autarky Definitions: If a country does not import or export goods or services from any other country, it is said to be in a position of autarky
3 An economy is said to be in a competitive equilibrium if all markets are perfectly competitive with no distortions such as taxes, subsidies, externalities, public goods, or government regulations Proposition: If the Brazilian economy is characterized by a competitive equilibrium under autarky then (1) Brazil will operate at a point on the production possibilities frontier (2) the relative price of computers in terms of coffee will be given by the (absolute value of

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Lecture 26 - Chapter 20 Trading with the world Final exam...

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