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# Week 2 discussion notes ECON 1011

GWU

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This 6 page Class Notes was uploaded by SophieSol on Sunday September 13, 2015. The Class Notes belongs to ECON 1011 at George Washington University taught by Yezer, A in Fall 2015. Since its upload, it has received 23 views. For similar materials see Principles of Economics I in Economcs at George Washington University.

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Date Created: 09/13/15

Notes from the discussion section Problem 1 Assume that Alice can make 3 apple pies per hour or 15 cupcakes per hour Bob can make 1 apple pie or 4 cupcakes per hour Alice spends 4 hours on cooking while Bob spends 5 hours on cooking AsmdsfmeeappigpmwSmdsfm time the superscripts represent either a What are the production functions of Alice and Boi Alice er Belly andthe subscripts stand for either appile pies or eupea kes Alice AA 3TA and CA 15Tc Bob AB 1TA and CB 4Tc b Write down their time constraints respectively Alice TA Tc 4 Bob TA Tc 5 c Write down the PPF s for Alice and Bob First we need to solve for the unknown variables for Alice We know that Alice s PPF equation is TA TC 4 We know AA 3TA We know CA 15Tc Rearrange the last two equations to solve for the variables TA and Tc AA 3TA I TA CA 15Tc I CA15 Tc Now plug in the variables to the PPF equation for Alice AA 3 CA15 4 But we want this equation in terms of apple pie AA 3 4 CA15 AA 12 15 CA Now do the same for Bob We know that Bob s PPF equation is TA TC 5 We know that AB 1TA We know that CB 4Tc Rearrange the last two equations to solve for the variables TA and TC AB 1 TA CB 4 Tc Now plug in the variables to the PPF equation for Bob ABl CB4 5 We want this in terms of apple pie AI3 5 14 CI3 d Alice s opportunity cost of making a cupcake is while Bob s opportunity cost making a cupcake is To gure this out we look at Alice s PPF equation rst To nd the opportunity cost of her making a cupcake we look at the slope which is 15 So her opportunity cost of making a cupcake is the absolute value of the slope which is 15 but the correct answer is 15 apple pie Similarly to determine Bob s opportunity cost of making a cupcake we look at his PPF equation and the slope there is 14 So his opportunity cost of making a cupcake is 14 apple pie note You can take the reciprocal of the opportunity cost for one variable to be the opportunity cost of the other So for Alice the opportunity cost of making an apple pie is 5 cupcakes and for Bob it is 4 cupcakes e Who has a comparative advantage in apple pie Whoever has the lower opportunity cost has the comparative advantage Alice s opportunity cost for apple pie is 5 cupcakes and Bob s is 4 cupcakes Bob has less to lose so he has the comparative advantage in apple pie f If an apple pie can be sold at 8 and a cupcake can be sold at 3 the total revenue of Alice if she sold all her homemade sweets is We will write the equation of the isorevenue line in standard form to answer this So we know that TR total revenue RA revenue from apple pies RC revenue from cupcakes In terms of Alice RA RA RC RA Alice s revenue RAA rev Aice s apple pies RCArev Aice s cupcakes RA 8AA 3CA RA 3CA 8AA AA 18 RA 38CA Bob39s AI3 38CI3 18 RI3 g Bob s total revenue is maximized when apple pie and cupcake and ppF for Bob the maximized total revenue AB 14 CB 5 Use the equations from part f to make a 5 is the yintercept and the graphA slope is 14 plug in 05 to nd C Appl e Pie x 0 514 c c 20 Thegreeniines are the venue lines The farther outward the line the higher the C k revenu 20quot39he green line that is the most outward hits the Upca es 200 iinate which corresponds to 0 apple pies and 20 cup 5 Cupcakes cost 3 so 3 x 20 60 as the maximized total revenue lnclass problem We have 180 bushels of corn per acre We have 30 bushels of wheat per acre We have 100 acres of land in total L land Corn production function C 180Lc I C180 LC Wheat production function W 30Lw I W3O LW What is the constraint on producing crops LW LC L PPF for wheat C180 W3O L C 180L 6W W 30L 16 C What is the opportunity cost of a bushel of wheat 6 bushels of corn 1 NonLinear PPF XON has Petroleum that can re ne into gasoline G or fuel oil F i If the change in 6 change in F is G small then the opportunity cost of F is small like it is in the red dot In the case of the blue dot the change in g over the change in F is big so the opportunity cost is You will get the most from having half and half If you double the petroleum the PPF will shift out parallel and advances in technology shifts it up and to the right If the slope is at opportunity cost is low If it is steep opportunity cost is high 2 Maximizing Revenue isorevenue line PG Price of Gas Pp price of feul R revenue R PGG price of gas x the amount of gas PFF price of fuel x amount of fuel Solve for G G RPG PFPG Let s say PF PG l slope 1 Isorevenue lines move out parallel Slope of PPF PFPG l delta G PG PFdelta F the value of G lost is the value of F created The marginal cost of lost G the marginal bene t of F The isorevenue line that hits the dot is technically efficient and allocatively efficient Technical ef ciency you can39t produce more of one good without giving up some of the other Allocative ef ciency revenue is maximized because opportunity cost price ratio of outputs Allocative ef ciency requires technical ef ciency If you have a linear PPF maximized revenue will almost always be a corner solution

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