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ECO182 - Lecture 2 - Crusoes PPF per day Wood(ft Slope of...

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Crusoe’s PPF per day Food (lbs.) Wood (ft.) 10 20 Slope of PPF = -10/20 = -1/2 = -0.5 Opportunity cost of 1 foot of wood = 2 lbs of food Opportunity cost of 1 lb.of food = 0.5 ft. of wood Marginal Rate of Transformation Of Wood to Food = 2 lbs/ft. Marginal Rate of Transformation Of Food to Wood =1/2 ft./lb.
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10 20 Food (lbs.) Wood (ft.) 25 25 Friday ’s PPF/day & Crusoe ’s PPF/day Crusoe’s Opp. Cost of Cutting 1 ft. more wood = 2 lbs. of food Friday’s Opp. Cost of cutting 1 ft. more wood = 1 lbs. of food FRIDAY has ABSOLUTE ADVANTAGE over CRUSOE In both Wood cutting and Food making More Food or Wood per day. FRIDAY has COMPARATIVE ADVANTAGE over CRUSOE in Wood cutting (only 1 lb. of Food is given up per foot of Wood) CRUSOE has COMPARATIVE ADVANTAGE over FRIDAY in Food making (only ½ ft. of Wood is given up per lb. of Food)
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CRUSOE FRIDAY WOOD FOOD (ft./day) (lbs./day) 10 20 25 25 Has C.A. in Food Has C.A. in Wood TOTAL PRODUCT BY SPECIALIZATION ACCORDING TO COMPARATIVE ADVANTAGE = 25+20 = 45 WRONG SPECIALIZATION 10 + 25 = 35 <45
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An economy with engineers
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