{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

lecture note 6

# 10 in competitive equilibrium each firm equate the

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: rium, each firm equate the value of the marginal product of labor to the wage rate, denoted w, as in the Ricardian model. (10.6) Total industry output in X1 is given by summing the first equation in (10.5) over all i firms. Total industry output X1 is as follows. (10.7) 11 Since " < 1, the exponent on the right-hand equation of (10.7) is greater than one: total industry output exhibits increasing returns to scale in its total labor input. Differentiate the middle equation in (10.7) along with the equation for X2 output, making use of the total labor supply constraint. (10.8) Divide the first equation of (10.8) by the second and rearrange. (10.9) 12 which is the slope of the production frontier, the marginal rate of transformation. The production frontier is a convex function: IRS Figure 10.4 Now combine (10.9) with the competitive pricing condition in (10.6). This gives us a relationship between the marginal rate of transformation and the equilibrium price ratio. (10.10) There is also a distortion between the MRT and the price ratio. Let’s ignore this for now. 13 Consider two identical economies as shown in Figure 10.5. Significant gains from trade exist through specialization. But, this is not the only possibility: there is no reason that equilibrium prices just happen to equal the cord connecting the endpoints of the ppf. Figure 10.6 shows an outcome...
View Full Document

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern