Econ 20 - Cite as: Chia-Hui Chen, course materials for...

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Unformatted text preview: Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Production Possibilities Frontier 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 31, 2007 Lecture 20 Production Possibilities Frontier and Output Market Efficiency Outline 1. Chap 16: Production Possibilities Frontier 2. Chap 16: Output Market Efficiency 1 Production Possibilities Frontier Marginal rate of transformation ( MRT ): • How much clothing must be given up to produce one additional unit of food. • The absolute value of the slope of the production possibilities frontier. • If MRT increases in food, then the production possibilities frontier is concave. • MC F MRT = . MC C Proof. Reducing $1 input from clothing, C decreases by 1 ; adding $1 MC C input to food, F increases by 1 . Thus, MC F 1 Δ C MC C MC F MRT = = = . Δ F 1 MC C MC F 2 Output Market Efficiency Suppose we have two industries, clothing and food, in the market. Consumers have demand for the two goods. They have a representative utility U ( C,F ). A Pareto efficient result occurs when the production possibilities frontier is tangent...
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This note was uploaded on 04/26/2009 for the course ECON MICRO taught by Professor Chen during the Spring '09 term at MIT.

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Econ 20 - Cite as: Chia-Hui Chen, course materials for...

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