ch02_appen - Chapter 2 Appendix Welfare Economics 1...

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1 Chapter 2 Appendix Welfare Economics
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2 Efficiency Resource Use Assumptions 2 inputs (capital and labor) 2 outputs (food and clothing)
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3 Production Functions F = F ( L F ,K F ) C = C ( L C ,K C ) Where F = food production C = clothing production L i = labor devoted to the production of good i K i = capital devoted to the production of good i
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4 Constraints L = L F + L K K = K F + L F
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5 Productive Efficiency It is not possible to reallocate inputs to alternative uses so that we can increase the output of any good without reducing the output of some alternative good.
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6 Figure 2A.1 Productive Efficiency F 3 F 6 F 5 F 2 F 1 F 4 C 2 C 3 C 4 C 5 C 6 C 1 E* Z* D F C F K* K* L* L* C 0 K L 0' L F L C K C K F Z 1
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7 Efficiency Condition MRTS F LK = MRTS C LK The Marginal Rate of Technical substitution of Labor for Capital for each good are equal
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8 Figure 2A.2 The Production-Possibility Curve A E 1 E 2 0 T T' D F C Food per Year Clothing per Year
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9 Pareto Efficiency Preferences on Consumption
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ch02_appen - Chapter 2 Appendix Welfare Economics 1...

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