1.2 Ricardian Model Flashcards
What is MPL
The marginal product of labour (MPL) is the extra output obtained by using one more unit of labour.
What is a special assumption of the Ricardian model regarding labor productivity?
The Ricardian model assumes no diminishing returns to labor, meaning the marginal product of labor is constant. For example, regardless of production levels, one extra hour of labor consistently yields 4 bushels of wheat or 2 yards of cloth.
How can Home’s production possibilities frontier (PPF) be graphed?
Home’s PPF can be graphed using the marginal products for wheat and cloth.
What does the slope of the PPF represent?
The slope of the PPF represents the opportunity cost of wheat, or the amount of cloth that must be given up to produce one more unit of wheat.
What does the slope of the PPF represent in economic terms?
The slope of the PPF equals the negative of the opportunity cost of wheat.
How can the magnitude of the PPF slope be expressed?
The magnitude of the PPF slope can be expressed as the ratio of the marginal products of labor for the goods.
How can the opportunity cost of increasing wheat production by 1 bushel be calculated?
Producing 1 additional bushel of wheat requires one-quarter of a worker’s time, which reduces cloth output by 1/2 yard, the amount that could have been produced with the same labor.
What does the slope of the PPF indicate about the good on the horizontal axis?
The slope of the PPF is the opportunity cost of the good on the horizontal axis, which is wheat in this case.
What do indifference curves represent in the Home economy?
Indifference curves represent demand by showing combinations of two goods, such as wheat and cloth, that provide the same level of utility.
What is the relationship between the levels of indifference curves and utility?
Points on higher indifference curves represent higher utility levels, indicating greater satisfaction.
What does each point on an indifference curve signify?
Each point on an indifference curve signifies a combination of two goods that provides equal satisfaction or utility to a person or economy.
What does each indifference curve illustrate about two goods?
Each indifference curve shows the combinations of two goods, such as wheat and cloth, that a person or economy can consume and be equally satisfied.
What does it mean on the point where indifference curve touches ppf?
The highest level of Home utility on the PPF is
obtained at point A, which is the no-trade
equilibrium.
What does the production possibility frontier (PPF) represent for a country in the absence of international trade?
In the absence of international trade, the PPF acts as a budget constraint for the country.
Where will a country produce when markets are perfectly competitive?
With perfectly competitive markets, the economy will produce at the point of highest utility, subject to the limits imposed by its PPF.
Autarky
No Trade
What does the slope of the PPF indicate about opportunity cost? (Home)
The slope of the PPF reflects the opportunity cost of producing one more bushel of wheat.
Under perfect competition, how is the opportunity cost of wheat related to its price? (Home)
Under perfect competition, the opportunity cost of wheat equals its relative price.
What does the price of a good represent in economic terms? (Home)
The price of a good reflects its opportunity cost.
How do firms determine how many workers to hire in competitive markets? (Home)
In competitive markets, firms hire workers up to the point where the hourly wage equals the value of one more hour of production.
How is the value of one more hour of labor calculated? (Home)
The value of one more hour of labor equals the amount of goods produced in that hour (MPL) times the price of the good.
When will labor be hired in each industry? (Home)
Labor will be hired up to the point where the wage equals
𝑃
×
𝑀
𝑃
𝐿
P×MPL for each industry.
What equation represents the equality of wages across industries in the Home country? (Home)
Use the equality of the wage across industries to obtain the following equation:
𝑃𝑊 × 𝑀𝑃𝐿𝑊 = 𝑃𝑐 × 𝑀𝑃𝐿𝐶
* Rearranging terms, we see that
𝑃𝑊/𝑃𝐶 = 𝑀𝑃𝐿𝐶/𝑀𝑃𝐿𝑊
* The right-hand side of the equation is the slope of the PPF (the opportunity cost of one more
bushel of wheat).
* The left-hand side of the equation is the relative price of wheat
How does a price ratio like PW/PC denote the relative price of a good? (Home)
The Home Country
𝑃𝑊/𝑃𝐶
* A price ratio like 𝑃𝑊/𝑃𝐶 always denotes the relative price of good in the
numerator (wheat, in this case), measured in terms of how much the good in the
denominator (cloth) must be given up.
* The relative price of wheat and opportunity cost of wheat must be equal in the
no-trade equilibrium at point A.
If tangent on PPF =
no-trade equalibrium
