ECO 2117 Lecture Notes - Lecture 20: Factor Endowment, Production Function, Longrun
29 Nov 2017
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Document Summary
Figure 12. 1 trade with variable factor proportions and di erent. The x-axis is the output of the agricultural output while the y-axis is the manufacturing output. The curved line is the production possibility frontier (ppf) The international price ratio is the cost function when the borders are open. The less developed world domestic price ratio is the cost function when the border is closed. The slope of the ppf and the cost function should be equal where the quantity produced is the optimum amount. This optimal quantity changes when the border is opened, moving from point a to b. When the border is closed, the price of agricultural goods is lower but when the border is opened, the price is higher because the country is naturally endowed with resources for agricultural production. The cost function of the open border will have a larger slope than the cost function for when the border is closed.
