1、A Comparative Advantage Model,in a Neoclassical World,A Two-Input Economy: A Neoclassical Model,A production function with two inputs: capital and labor Capital and labor are imperfectly substitutable: an increasing cost production function Isoquants Isocosts How does each firm decides on the mix of
2、 inputs: the profit maximizing rule,A production function:,Q = f (K, L); given K, as L increases Q will increase; given L, as K increases Q will increaseCapital, K , and Labor, L, are to some extent substitutable Both K and L are subject to decreasing returns.,Special cases:Fixed-proportions product
3、ion functions Perfectly substitutable inputs,An Isoquant: a graphical representation of a production function,Qx0,Qx1,K,L,0,Qx = f (K, L),The Isoquant: A Definition,An isoquant is a curve drawn in a two-dimensional space representing all the combinations of two inputs (K and L), measured along the t
4、wo axes, that can produce a given level of output.,An isoquant map is a group of isoquants each representing a certain level of output for a given production function,Isoquants farther from the origin represent higher levels of output,Isoquants cannot cross,An Isoquant Map,Qx0=10,Qx1,K,L,0,Qx = f (K
5、, L),Qx2,Qx3,Qx4,Qx5 =100,The slope of an isoquant: the marginal rate of technical substitution (MRTS),Qx0,K,L,0,Qx = f (K, L),A,B,Slope = K/L = MRTS,Production Costs: Isocost,Given Q = f ( K, L )Cost = C = r K + w L where r = price of K; w= price of L,K,L,o,C/r,C/w,- w/r,Equilibrium,Qx0=10,Qx1,K,L,
6、0,Qx = f (K, L) C = rK + wL,Qx2,Qx3,Qx4,Qx5 =100,a,b,c,MRTS = w/r,C/w,C/r,Equilibrium,Qx0=10,Qx1,K,L,0,Qx = f (K, L) C = rK + wL,Qx2,Qx3,Qx4,Qx5 =100,a,b,c,MRTS = w/r,C/w,C/r,Expansion Path,A Two-Industry Economy,K,L,o,Computers,Rugs,(K/L)c,(K/L)R,W/r,Kc,KR,Lc,LR,0,0,K,L,K,L,X,Y,D,A production possi
7、bilities curve for an Economy with two imperfectly substitutable resources producing two goods:,o,Computers,Rugs,Uo,U1,MRS = MRT,Two Countries,C,R,R,C,o,o,UM,UA,Mexico,U.S.,A two-Country Model,C,R,R,C,o,o,p,C,P,f,c,F,Mexico,U.S.,Can these two countries gain from trade?,Y,Y,X,X,0,0,Country A,Country B,Ua,Ub,Two Countries,C,R,R,C,o,o,UA,UB,Mexico,U.S.,Can these two countries gain from trade?,
