Differing factor intensity at every point on the ppf k

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Unformatted text preview: on of one good, rather than another – Increasing the production of one good eventually requires using inputs that are poorly suited for that good’s production. • RPT represents how much X can be traded for Y while keeping inputs K and L productively employed. • RPT is equal to the ratio of marginal costs of production. • Differing factor intensity – At every point on the PPF, K and L are efficiently employed – By definition, this means that costs are minimized. – Since inputs are in fixed supply, minimum costs of producing X and Y will be constant. Lecture 17 Lecture 17 Econ 11--Spring 2001 – Increasing output of X raises its marginal cost. – Increasing output of Y raises its marginal cost. – X and Y may require K and L in different proportions. – Then, even under constant returns to scale and non-specialized inputs, making more of X or Y may require the use of relatively more of the less intensively required factor, raising marginal costs. 23 Lecture 17 Econ 11--Spring 2001 24 4 Prof. Jay Bhattacharya Econ 11--Spring 2001 Equilibrium in Two Good Economy PPF, Consumer Utility and Prices At these prices, there is excess demand for X and excess supply of Y. Px should increase and Py should decrease. Y Sy Y Y* Dy U(X, Y) U(X, Y) Slope = Px*/Py* Slope = Px/Py Sx Lecture 17 Dx X* X Econ 11--Spring 2001 25 Lecture 17 Econ 11--Spring 2001 X 26 Properties of Equilibrium Px* MC x MU x = RTS = = = MRS Py* MC y MU y • At P*x and P*y, both product markets clear. • Profits and utility are maximized. • Labor and capital are efficiently used since final consumption is on the PPF. • Profits equal zero. (Need to discuss input markets to show this). Lecture 17 Lecture 17 Econ 11--Spring 2001 27 5...
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