PPF Frontier

Question 1

All points across the PPF frontier are considered?

Answer 1

Efficient output pairs.

RM model : Full employment (L)

HOS model : Full employment of L and K

Question 2

Derive equation of PPF in RM model

Answer 2

Y = y x Ly

X = x x Lx

Lx + Ly = L => Full employment of labour force

Y = y x Ly

Y = y (L-Lx)

Y = y (L-X/x)

Y = yL- y/x X => PPF

Question 3

In RM, what is the absolute value of the PPF frontier.

Answer 3

The opportunity cost to produce an extra unit of X (in terms of Y units)

Question 4

In RM, what is the Autarky Equilibrium

Answer 4

Where the indifference curve is tangent to the PPF frontier.

Question 5

What are the X and Y intercept on the graph

Answer 5

The country’s maximum potential output in X or Y

Question 6

RM, conditions for Autarky?

Answer 6

Both goods produced domestically

Perfect competition (free entry / exit + zero profits)

Equilibrium prices, such that x Px = W and y Py = W. (Value of worker)

Unit labour requirement : w = 1/x (x = avr cost)

Question 7

In RM, three implications for Autarky equilibrium.

Answer 7

1. Real wage in terms of a given good = Output per worker in that industry

W/Px = x

W/Py = y

2. Relative price of a good = Opportunity cost of producing an extra unit of it

x Px = w = y Py

Px/Py = y/x = |Slope|

3. In AUT, country’s aggregate BC = PPF

Px X + Py Y = L W

Y = (L W - Px X) /Py

Y = (W L/Py) - (Px X/Py)

Y = y L - (y/x) X