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4 Wednesday, August 30, 2006

# 4 Wednesday, August 30, 2006 - 12 8 4 1 2 3 4 5 CDs The...

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Wednesday, August 30, 2006 Microeconomics Scenario A Scenario B Consumption Consumption Goods Goods Per Next Year Per Year Year Next Year Investment goods per year Investment goods per year The outward shift of the PPF in the following year is greater in A than in B because more investment occurs in A. The opportunity cost of having more growth in the future is the consumption an economy gives up today. Example Theoretical Reality Military Military Goods Goods M1 A ½ M2 B M1 A M2 B C1 C2 Civilian Goods C1 C2 Civilian Goods Peace Dividend

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Wednesday, August 30, 2006 STRAIGHT LINE PPF Good 1 *Does not exhibit law of increasing costs *Opportunity cost of additional unit of good 2 is always the same regardless the total output of good 2 *Resources are not specialized Good 2 CONSUMPTION POSSIBILITES FRONTIER (not in book) 1. \$50 from your grandmother 2. you buy two goods CDs and gasoline 3. CDs = \$10/CD 4. GASOLINE = \$2.50/gallon Gasoline (Gallons) 20 16 CPF – (always a straight line)
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Unformatted text preview: 12 8 4 1 2 3 4 5 CDs The opportunity cost of 1 gallon of gas = ¼ of a CD The opportunity cost of 1 CD is 4 gallons of gas *The opportunity cost of the x-axis, on a straight line PPF or CPF, is always equal to the absolute value of the slope. The y-axis is the reciprocal of the absolute value of the slope. Wednesday, August 30, 2006 In the case of a CPF the prices of the goods and the income endowment are assumed fixed. When these things change, the CPF will shift. Ex. 1 Suppose the income endowment increased to \$70 Gasoline 28 (Gallons) 24 20 *CPF shifts out 16 *Opportunity costs do not change 12 8 Same Slope 4 1 2 3 4 5 6 7 CDs Ex. 2 Suppose the price of CDs increases to \$15 income is remaining at \$50 Gasoline (Gallons) 20 16 *CPF shifts inward 12 *Opportunity Costs of a CD is 6 gallons of gas *Opportunity Costs of a gallon of gas is 1/6 of a CD 8 4 1 2 3 4 5 CDs...
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