ECON 1011, Week 2
ECON 1011, Week 2 ECON 1011
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This 1 page Class Notes was uploaded by Samantha Notetaker on Sunday September 11, 2016. The Class Notes belongs to ECON 1011 at George Washington University taught by Yezer, A in Fall 2016. Since its upload, it has received 7 views. For similar materials see Principles of Economics I in Economics at George Washington University.
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Date Created: 09/11/16
9.7.2016 I. NonLinear Production Possibilities a. On the Line technically efficient b. Above the Line not feasible c. Below the Line not technically efficient II. Maximizing Revenue on a PPF a. To maximize revenue, you must be technically efficient – i.e. be on the PPF. But that is not enough because there are lots of points on the PPF and you want the one point that gives the largest revenue. b. You must add a new line to the diagram – the isorevenue line connects points on the diagram that have the SAME revenue i. Hence the name isorevenue from the Greek word “isos” meaning equal) c. Finding the equation of the isorevenue line between fuel oil and gasoline… i. If P Gis the price of gasoline and PF is the price of fuel, then revenue is R = P G + PFF ii. Now solve this linear equation to put it in standard form for a curve with F as the independent and G as the dependent variable and get: G = (R/P ) GP /P )F G iii. The G intercept of the isorevenue line is R/P Gand the slope is –P /F .G Let’s say PF = PG so slope = –1. d. Revenue is maximized at the point of tangency e. Concepts: i. Technical efficiency: any point on the PPF is technically efficient ii. Allocative efficiency: the opportunity cost in production equals the price ratio of the outputs iii. Allocative efficiency requires technical efficiency iv. Engineers pursue technical efficiency, economists pursue allocative efficiency f. What happens to the revenuemaximizing solution if the price of gasoline doubles so that P G= 2 P Fand the slope of the isorevenue line, –P /F Gs now –(1/2) i. The isorevenue lines are now much flatter and there is a new tangency with the PPF at F’,G’ such that F’ < F* and G’ > G*. The rise in gasoline price has caused a shift in production so that there is more gasoline and less fuel oil! ii. What happens when the price is raised: 1. Slope of isorevenue lines changed 2. Tangency point of the isorevenue line with the PPF moved to a new point with more G and less F 3. A rise in the price of G, caused revenue maximizing firms, to produce more G and produce less F 4. At the new point of allocative efficiency, marginal opportunity cost of fuel oil is again equal to the marginal benefit of fuel oil: ΔG/ΔF = (P /F )G OR: ΔG/P =ΔG/P F
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