Podcast
Questions and Answers
What does the absolute value of the slope of the PPF represent in terms of production?
What does the absolute value of the slope of the PPF represent in terms of production?
- The fixed labor hours for producing goods A and B.
- The total cost of producing an extra unit of A.
- The total revenue from producing goods A and B.
- The opportunity cost of producing an extra unit of B in terms of A. (correct)
What condition must be met for workers to choose to produce wine over the other good?
What condition must be met for workers to choose to produce wine over the other good?
- P C /a LC < w C < w W (correct)
- P W /P C < a LW /a LC
- P W /P C = a LW /a LC
- P C /a LC = w W
What is the effect of opening up to trade according to the content provided?
What is the effect of opening up to trade according to the content provided?
- It decreases the relative prices of goods in both countries.
- It sets the relative prices of goods between both countries at autarky levels.
- It aligns the prices of goods A and B with the global market.
- It sets the relative prices of goods in between both countries' autarky levels. (correct)
In a perfectly competitive market, what does it indicate when the difference between total revenue and total cost is zero?
In a perfectly competitive market, what does it indicate when the difference between total revenue and total cost is zero?
Which relationship indicates that a worker is indifferent between producing goods A and B?
Which relationship indicates that a worker is indifferent between producing goods A and B?
Flashcards
Opportunity cost on PPF
Opportunity cost on PPF
The absolute value of the slope of the PPF, a LC /a LW , represents the opportunity cost of producing one extra unit of good B in terms of good A. It indicates how much of good A needs to be sacrificed to gain one additional unit of good B.
Wage Equation
Wage Equation
In perfect competition, firms aim for normal profits, meaning zero profit. Their total revenue (PQ) equals total cost (wL). This leads to a wage equation: w = P/a, where w is the hourly wage, P is the price of the good, and 'a' is the labor productivity (output per hour).
Worker Specialization
Worker Specialization
Workers choose the production that offers the highest hourly wage. They compare the wage (P/a) for each good. If one good offers a higher wage, all workers will specialize in that good. This decision is driven by the pursuit of higher income.
Trade and Relative Prices
Trade and Relative Prices
Signup and view all the flashcards
Worker Indifference
Worker Indifference
Signup and view all the flashcards
Study Notes
Production Possibilities Frontier (PPF) and Opportunity Cost
- The absolute value of the slope of the PPF, calculated as (change in LC)/(change in LW), represents the opportunity cost of producing an extra unit of good B in terms of good A.
Factors Affecting Production
- Actual production also depends on prices, which reflect the labor hours needed to produce goods and the consumer demand.
Perfect Competition and Normal Profit
- In perfect competition, firms earn zero normal profit.
- This means total revenue (TR) equals total cost (TC).
Wage Determination in Perfect Competition
- In perfect competition, the wage rate (w) can be determined by setting total revenue equal to total cost for each good (C & W):
- For good C: wC = PC (QC/LC) = PC/aLC
- For good W: wW = PW (QW/LW) = PW/aLW
- Q represents the respective units of good B and A; w is hourly wage, L is fixed labor hours, and P is price.
Labor Allocation Decisions
- If (PC/aLC) = wC < wW = (PW/aLW) (or equivalently PW/PC > aLW/aLC), workers will only produce wine.
- This decision depends on whether an opportunity cost has higher pay, whereby workers only produce a good if it offers a higher hourly rate. Compensation until hourly wage is equivalent to the other good is also taken into consideration.
- Workers are indifferent when the hourly wage values for each good are equal.
Trade and Relative Prices
- Opening a country up to trade sets the relative prices of goods between the two countries, which fall between both countries' autarky levels (no trade).
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
This quiz covers key concepts in economics, particularly focusing on the Production Possibilities Frontier (PPF) and the opportunity cost associated with production choices. Additionally, it delves into factors affecting production, perfect competition, and wage determination. Test your understanding with these essential economic principles!
