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Economics 180
Lecture 1.1
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Exam Dates
• January 14 Chapters 2
• February 11 Chapters 3-6
• March 9 Chapters 7-12
• March 17 Final Exam
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Section IBackground Comparative
Advantage• One Country
– Indifference Curves
– Budget Constraints• Fixed Income and Prices• Initial Endowment and Fixed Prices• Initial Endowment -- Transformation
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Notation
• Home (blank) Foreign (*)
• Two Products: Food and Clothing– Endowments eF e*F eC e*C
– Consumption xF x*F xC xC
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Preferences
Utility FunctionsCobb Douglas – Homothetic
U = xCxF
1-
Indifference CurvesxF
xC
U0
U1
U2
Increasing Utility
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Budget Constraints
Fixed Income and Prices
pFxF + pCxC = M xF =M/pF –(pC/pF)xC
M/pF
M/pC
xF
xC
-pC/pF
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Budget Constraint
Initial Endowment and Fixed Prices
pFxF + pCxC = pFeF + pCeC
xF =eF/pF –(pC/pF)(xC – eC)
(pFeF+pCeC)/pF
(pFeF+pCeC)/pCeC
eF
xC
xF
-pC/pF
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Budget Constraint
Initial Endowment and Transformation
Transformation: One unit of Food can be transformed into k units of Clothing
xC = eC – k(xF – eF) xF = eF – (1/k)(xC – eC)
eF+(1/k)eC
eC+keF
-1/k
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Economics 180
Lecture 1.2
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1
*
= 75 = 75
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= F/C =
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