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class16

# class16 - Class 16 Production and Trading Midterm...

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Midterm Information
Midterm Information

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Problem Set
Outline roduction ± Production ± Production and Trade ± Comparative Advantage ± Efficiency of Equilibrium

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Production 2q 1 +q 2 =8 8 Suppose Jane can produce either Wood or Candy. She has 8 hours to 4 work Producing ( q 1 , q 2 ) takes her f( q 1 ,q 2 ) hours : -2 Opportunity Cost 0 2 2 4 f( q 1 ,q 2 )=2q 1 +q 2 3 PPF Opportunity Cost: Production Possibilities: ( q 1 , q 2 ) s.t. f( q 1 ,q 2 ) 8 2q 1 +q 2 8 Producing 1 unit more candy costs Jane 2 units of wood. Production Possibility Frontier : f( q 1 ,q 2 )=8
Production : Example I Optimal production decision : Maximize U (q 1 , q 2 )= q 1 q 2 8 s.t. 2q 1 +q 2 = 8 Substitution: U J = q 1 q 2 4 2q 1 +q 2 =8 q 2 = 8 - 2q 1 At the optimum: RS = RT 0 2 2 4 3 PPF MRS MRT -(±q 2 / q 1 ) = -2 (8 - 2 q 1 ) / q 1 = 2 4q 1 = 8 Optimum: q 1 = 2 , q 2 = 4

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Production : Example II Production : f( q 1 ,q 2 ) = q 1 2 +q 2 = 4 Utility : U (q 1 , q 2 ) = q 1 q 2 4 3 -1 Opportunity Cost of first candy unit -3 Opportunity Cost of econd candy unit 1 Jane 0 1 2 second candy unit I J Jane’s Opportunity cost are increasing: 11 2 f qq MRT =− 2 1 f q
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class16 - Class 16 Production and Trading Midterm...

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