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ECON 1011, Week 2

by: Samantha Notetaker

ECON 1011, Week 2 ECON 1011

Samantha Notetaker

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Linear and Non-linear PPFs
Principles of Economics I
Yezer, A
Class Notes
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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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