me

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* ☒4"
0113112022
-
Lecture note -

* Micro concepts Examples trade models

Cobb
2
factors 2
goods Douglas
-

L ,
K X ,
Y
3
factors 2 goods
L ,
K ,
T X ,
Y
1 2 Linear
factor goods :

L X ,
Y

⑧reduction
functions :

(a) Cobb -

Douglas :
~
constant returns to scale l CRS )
-45 ( 06 (1)
con-syt-nan.tl
l l LL K
)
q =
f ,
=

(2) Linear : 1
factor
ql ) f = LL ) = =
1a . ( a > 0)

28
Notice : APL =
Mph =
LY ) =

yh
=
ta where a is unit labor
coefficient
Tools :

(I PPF : Production -

Example 1 : I
factors ( L , K) ,
2
goods (X ,
Y)

Possibility Frontier
Definition : Combinations of XP , Y
"
( Production amount ) such that
Max XP ( ) =
fx ( Lx .
Kx )

subject to

XP ( ) =
fy ( Ly Ky ) ,

I
-

fixed labor endowment

: =
↳ + Ly
I fixed capital endowment
: I =
Kx +
Ky
"
( a.k.a Douglas )
"

If production functions are nice Cobb the isoquants

-

Kx n Ky a

> ↳ > Ly
"

. . .
then PPF is
"
nice

Ya

>
✗

I
Define PPF
figure out the shape of PPF , ,
K
#-) K -

intensive Assume : Y is L
-

intensive ; ✗ is K -

intensive
L -

intensive Ky
^
Kx T

¥ > Ly
IF > ↳

For
any wl
wage ) ,
r ( rental price of capital )
Kx Ky Ly Lx
Ky "
ensure

III. Countries I I home I* Ñ*

foreign
: :
• ,
,

endowments Assume home is

relatively well endowed with capital
/*
Ya home Ya
4- intensive) LL - intensive )-
* trade this foreign

trade this

p* >
✗ 1K -

intensive ) -
✗ 1K -

intensive )

#-) .
1
factor ( L ) Assume the production functions are
"
nice
"
.
Production function with IMPL
2
goods ( X Y ) ,
f× a
fy
^

2=8×11×7 y
=
fylly )
> ↳ > Ly
y
^

Ly <
r
µ a • >
✗

|
,

"

4- ×

, i

- - - -.

Lx
(E) .
Linear production Example 3 : A factor ( L)

Qs Textiles
function 2
goods :
Soy =
,
=
QT
Linear production function
Assume : I 100 =

Qs =L ↳ ; Qt =L, 4-

labor 2
Unit
coefficients :
as =
, at = 4

I
PPF equation : NQS 5- as

* Option 1 : I =
↳ +
↳ 100 =
↳+ LT 50 -

↳ Qs
}
2
=
100 IQs 4Q+
Replacing :
= +

4- = 4 QT
I
50 as as
/ Slope / = = = %
£5
>
25 , AT
( const ) .

at
=
La ,
<

"

* Option 2 : Assume QT = 0 Q.ms =

f- I =
100.21 = 50

"

Qg = 0 QTM =
14 I =

100.41 = 25

And we know that this is linear function

 Lecture note
0210212022

LI > Iso value lines Combinations of goods produced ( XP , YP ) such that

they result in the same

total Value ( i. e. )
" "
Revenue
Remark Px Py taken
:
good prices ,
are as
given a constant

Example :

Px = 1
, Py = 2

20 =
4 =
Px XP .
+ Py XP.
14 = 20 = 1. XP -12 YP
↳ fixed I
30 =
Vg =
Px XP .
+
Py YP .

11J = 30 = 1 .
XP -12 YP
:

10 = Vio = Px XP .
+
Py YP .

a Y
"
1 Slope I PY Px
( of
=

4
-

py
=L
10 -
all
of them )
J, Px
=

py
✗
¥-1
=p:
LI) Profit
.
Max .
& Idea of firm with
ability to
produce both
goods
Revenue Maximization Max Px XP .
+
Py .
YP W . ( ↳ + Ly ) RK ( Kx + Ky ) .

Tage That price

of capital
TR = P ✗ Q TC = W L t RK

Constraints :

XP
-

f-✗ ( Lx Kx )
}
=
,
=
↳ +
LY Trade models
YP I
fy Ky Ky ) Kxtky
=
=
,

Since all used

factors are & prices
Revenue
are
given ,
this
imply that :

Profit max .
coincides with Max .

the ( XP YP ) the PPF isovalue

We can
find profit max ,
using &

lines .

yn Ky ^

Consumer Cost
Utility ☒
Minimization
C W.LY Rk Ky
utility
= + .

y*
_yyma× > ✗
ky*_qy
•
I =

>
( 100 )
constant

Ly
✗
*
y*
 .
Revenue Max . Revenue maximization
subject to PPF

Example "
A :
Example B :

Iso value lines Y "

y

y*P|- y
slope 7 this slope is steeper
p*
p*
y*P
-1
> ✗ *P
> ✗
*P
✗ ✗
A B
Px Px
Slope =
Slope =

Py B A Py
In this
Px p×
* case ,

Py Py
B A
*P *p
✗ ✗
(
y*P y*p
* P* :
"
production Point
"
= Combinations of ✗ ,
Y that maximize

profit / revenue given PPF & Prices ( Px Py )

, .

(E) .
Linear PPF
Example :

Y Y
!→p*
a

1 2
PPF
slope is value p*
,

.
>
✗ •
>
✗

^ d

¥
PX
Slope =
Slope =

Py
In this case : Y*" 0 ,
✗
*"
= 0 y*P = 0
,
✗
*P
O
Questions : What is / are the (✗ .
Y ) combinations that max .

profit / revenue
if . . .

1 .
I slope isovaluel = I slope of PPFI

2 .
I slope isovaluel I slope of PPFI

3 .
I slope isovaluel I slope of PPFI