The opportunity cost of each of the first 100 snowboards equals half a pair of skis; each of the next 100 snowboards has an opportunity cost of 1 pair of skis, and each of the last 100 snowboards has an opportunity cost of 2 pairs of skis. What is the production possibilities curve? The downward slope of the production possibilities curve is an implication of scarcity. Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. If the firm were to produce 100 snowboards at Plant 3, ski production would fall by 50 pairs per month (recall that the opportunity cost per snowboard at Plant 3 is half a pair of skis). In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point A. Thus, the economy chose to increase spending on security in the effort to defeat terrorism. Figure 2.2 “A Production Possibilities Curve”, Figure 2.3 “The Slope of a Production Possibilities Curve”, Figure 2.4 “Production Possibilities at Three Plants”, Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports”, Figure 2.6 “Production Possibilities for the Economy”, Figure 2.9 “Efficient Versus Inefficient Production”, Next: 2.3 Applications of the Production Possibilities Model, Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. The diagram below shows an economy's current production possibilities curve for capital goods and consumer goods. Further, the economy must make full use of its factors of production if it is to produce the goods and services it is capable of producing. Producing more skis requires shifting resources out of snowboard production and thus producing fewer snowboards. answer choices . Where will it produce the calculators? Could an economy that is using all its factors of production still produce less than it could? It is the amount of the good on the vertical axis that must be given up in order to free up the resources required to produce one more unit of the good on the horizontal axis. The segment of the curve around point B is magnified in Figure 2.3 “The Slope of a Production Possibilities Curve”. it is a tool which … Here, the opportunity cost is lowest at Plant 3 and greatest at Plant 1. Notice the curve still has a bowed-out shape; it still has a negative slope. Figure 2.9 Efficient Versus Inefficient Production. The production possibilities curve is a crucial part of any AP Economics review for a couple of reasons. Part A Use Figures 2.1 and 2.2 to answer these questions. At some point, governments must decide three questions: what to produce, how to produce, and for whom to produce. The law of increasing opportunity cost tells us that, as the economy moves along the production possibilities curve in the direction of more of one good, its opportunity cost will increase. These resources were not put back to work fully until 1942, after the U.S. entry into World War II demanded mobilization of the economy’s factors of production. This is a result of transferring resources from the production of one good to another according to comparative advantage. The answer is “Yes,” and the key lies in comparative advantage. We see in Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports” that, beginning at point A and producing only skis, Alpine Sports experiences higher and higher opportunity costs as it produces more snowboards. A production possibilities curve shows the combinations of two goods an economy is capable of producing. It illustrates the production possibilities model. In Plant 2, she must give up one pair of skis to gain one more snowboard. Then under that is another row that says oranges. In the section of the curve shown here, the slope can be calculated between points B and B′. Production Possibilities. At point A, the economy was producing SA units of security on the vertical axis—defense services and various forms of police protection—and OA units of other goods and services on the horizontal axis. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. (Many students are helped when told to read this result as “−2 pairs of skis per snowboard.”) We get the same value between points B and C, and between points A and C. Figure 2.2 A Production Possibilities Curve. Draw a PPC demonstrating what a point on, inside and outside of the curve represents. }BÇ��u�H��F�]%O�\i����Z�|5~�I����w`tXa47$1���45����`�c�,q�a�\3������m������ �ζ�wK�~Ҧc����xR 0�p��� =��k|�?e���qY� ��g��Te��ج�`i�C����R:���"W[��rSEe}�Y$�O���W�o�`R�� ���~�{�i˛���x�u��U7��e.z]i�}���\ �������������qhS�;��rN��͐q�i.�}8slm �O~t��) L�ykh��{�?��ɜ��70�%Ly6j�������݋w +��&`|6��:? 2. Airports around the world hired additional agents to inspect luggage and passengers. This production possibilities curve includes 10 linear segments and is almost a smooth curve. A production possibilities curve can tell about B. qJ�Z�c�*u�����тhS. The slope between points B and B′ is −2 pairs of skis/snowboard. E Upward-sloping Production Possibilities Curve. This is one way of simplifying, and it shows how an Here is the problem. In this section, we shall assume that the economy operates on its production possibilities curve so that an increase in the production of one good in the model implies a reduction in the production of the other. Here, we have placed the number of pairs of skis produced per month on the vertical axis and the number of snowboards produced per month on the horizontal axis. The exhibit gives the slopes of the production possibilities curves for each plant. It is a model of a macro economy used to analyze the production decisions in the economy and the problem of scarcity. Suppose the firm decides to produce 100 radios. If it is using the same quantities of factors of production but is operating inside its production possibilities curve, it is engaging in inefficient production. The table in Figure 2.2 “A Production Possibilities Curve” gives three combinations of skis and snowboards that Plant 1 can produce each month. The attempt to provide it requires resources; it is in that sense that we shall speak of the economy as “producing” security. If the firm wishes to increase snowboard production, it will first use Plant 3, which has a comparative advantage in snowboards. We can think of each of Ms. Ryder’s three plants as a miniature economy and analyze them using the production possibilities model. The productive resources of the community can be used for the production of various alternative goods. It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. Hong Kong, with its huge population and tiny endowment of land, allocates virtually none of its land to agricultural use; that option would be too costly. That will require shifting one of its plants out of ski production. It slopes downward from left to right- Production possibility curve slopes downward because both the variables involve in the equation are inversely related as one increase then other one decreases and vice versa because the resources are constant. A movement from A to B requires shifting resources out of the production of all other goods and services and into spending on security. Some workers are without jobs, some buildings are without occupants, some fields are without crops. It is hard to imagine that most of us could even survive in such a setting. Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month. Use a production possibilities curve to explain efficiency in terms of opportunity cost, consumption, and scarcity. To put this in terms of the production possibilities curve, Plant 3 has a comparative advantage in snowboard production (the good on the horizontal axis) because its production possibilities curve is the flattest of the three curves. A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. 1. Expanding snowboard production to 51 snowboards per month from 50 snowboards per month requires a reduction in ski production to 98 pairs of skis per month from 100 pairs. When factors of production are allocated on a basis other than comparative advantage, the result is inefficient production. In radios? The second plant, while smaller than the first, was designed to produce snowboards as well as skis. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions. Beyond that, th… Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown. But since they are scarce, a choice has to be made between the alternative goods that can be produced. Production Possibilities Curve for Watermelon vs. Shoe Production in Capeland 20 15 Watermelons (millions of tons) 1. Suppose a manufacturing firm is equipped to produce radios or calculators. Its land is devoted largely to nonagricultural use. Economic Growth: By relaxing the assumptions of the fixed supply of resources and of short period, … p$����،5w,ߴ�G���c|��Vb�}3�Ǟ�GL�mzm�`.�2�x�����\=~����)����x7��-Nb�?FDE`g�2P3��g�d�;��� ���; ٷ��Wk��"g���3�&[�B/K�Pq�ATR T����>�)���? In the section of the curve shown here, the slope can be calculated between points B and B′. View Notes - handout-1ans from ECON 180-004-20 at University of California, Los Angeles. When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production. Now draw the combined curves for the two plants. more future consumption in exchange for less current consumption. Hello, I am trying to figure out the production possibility curve in my macroeconomics online course. The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month. 4 0 obj This curve shows different ways Capeland's can be used. When devoted solely to snowboards, it produces 100 snowboards per month. The increase in resources devoted to security meant fewer “other goods and services” could be produced. The slopes of the production possibilities curves for each plant differ. Production and employment fell. 1. The slope of the linear production possibilities curve in Figure 2.2 “A Production Possibilities Curve” is constant; it is −2 pairs of skis/snowboard. The economy had moved well within its production possibilities curve. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. PPC/PPF DRAFT. Suppose an economy fails to put all its factors of production to work. 3. C Horizontal Production Possibilities Curve. Plant 3’s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. Cocoa/year Use the figure to answer the following questions: (a) Define production possibility curve. The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity cost—Plant 3. Suppose that, as before, Alpine Sports has been producing only skis. Plant 3 would be the last plant converted to ski production. Economists conclude that it is better to be on the production possibilities curve than inside it. Suppose further that all three plants are devoted exclusively to ski production; the firm operates at A. Answer: Use the production possibilities model to distinguish between full employment and situations of idle factors of production and between efficient and inefficient production. Figure 2.8 “Idle Factors and Production” shows an economy that can produce food and clothing. Please share your supplementary material! !��v��C����ڤ!����DA��#L�h)�Zj\�; �.�P��q}�� The production of both goods rises. In our example, all three plants are equally good at snowboard production. We can use the production possibilities model to examine choices in the production of goods and services. An economy achieves a point on its production possibilities curve only if it allocates its factors of production on the basis of comparative advantage. That was a loss, measured in today’s dollars, of well over $3 trillion. Suppose Alpine Sports operates the three plants we examined in Figure 2.4 “Production Possibilities at Three Plants”. Comparative advantage thus can stem from a lack of efficiency in the production of an alternative good rather than a special proficiency in the production of the first good. With all three of its plants producing skis, it can produce 350 pairs of skis per month (and no snowboards). The slope of Plant 1’s production possibilities curve measures the rate at which Alpine Sports must give up ski production to produce additional snowboards. The production possibilities curve (PPF) relates to a graphical representation of how an economy can efficiently utilize its resources when distributed among various products. Economists often use models such as the production possibilities model with graphs that show the general shapes of curves but that do not include specific numbers. According to the graph above, if a country is currently producing at point X, the opportunity cost of producing another consumer good is. Such specialization is typical in an economic system. ... answer choices . The Great Depression was a costly experience indeed. We begin at point A, with all three plants producing only skis. The products being compared on this graph are and 2. We may conclude that, as the economy moved along this curve in the direction of greater production of security, the opportunity cost of the additional security began to increase. Notice that this production possibilities curve, which is made up of linear segments from each assembly plant, has a bowed-out shape; the absolute value of its slope increases as Alpine Sports produces more and more snowboards. Clearly, the transfer of resources to the effort to enhance national security reduces the quantity of other goods and services that can be produced. the value of the next best alternative that is given up due to the choice you made . The curve shown combines the production possibilities curves for each plant. A point inside of the production possibilities curve is inefficient because it is possible to produce more of one or both goods without opportunity cost. Reviewing Key Terms In the wake of the 9/11 attacks in 2001, nations throughout the world increased their spending for national security. She added a second plant in a nearby town. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes. The production possibilities curves for the two plants are shown, along with the combined curve for both plants. Draw the production possibilities curve for Plant R. On a separate graph, draw the production possibilities curve for Plant S. Which plant has a comparative advantage in calculators? Alpine Sports can thus produce 350 pairs of skis per month if it devotes its resources exclusively to ski production. 9th - 12th grade. That would bring ski production to 300 pairs, at point B. At point A, Alpine Sports produces 350 pairs of skis per month and no snowboards. But the production possibilities model points to another loss: goods and services the economy could have produced that are not being produced. Production Possibilities Curve Illustrates Production Possibilities Curve Production Possibility Curve Tuition And Fees International Trade TERMS IN THIS SET (30) Sarah can wash, fold, and iron a basket of laundry in two hours and prepare a meal in one hour. A production possibility curve is a curve showing possible combina-tions of goods that an economy can produce given a fixed amount of resources, fixed technology, and efficient use of these resources. The negative slope of the production possibilities curve reflects the scarcity of the plant’s capital and labor. People work and use the income they earn to buy—perhaps import—goods and services from people who have a comparative advantage in doing other things. Production on the production possibilities curve ABCD requires that factors of production be transferred according to comparative advantage. We normally draw a PPF on a diagram as concave to the origin. The economy produces SA units of security and OA units of all other goods and services per period. The gains we achieve through specialization are enormous. Production totals 350 pairs of skis per month and zero snowboards. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. Explain the difference between a bowed out PPC and a straight line PPC. She also modified the first plant so that it could produce both snowboards and skis. a graph that shows how much an economy can produce between 2 goods. Increasing the availability of these goods would improve the standard of living. These are also illustrated with a production possibilities curve. It retains its negative slope and bowed-out shape. In business analysis, the production possibility frontier (PPF) is a curve illustrating the varying amounts of two products that can be produced when both … We have already seen that an additional snowboard requires giving up two pairs of skis in Plant 1. Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to the vertical or to the horizontal axis. How many calculators will it be able to produce? Producing a snowboard in Plant 3 requires giving up just half a pair of skis. It has an advantage not because it can produce more snowboards than the other plants (all the plants in this example are capable of producing up to 100 snowboards per month) but because it is the least productive plant for making skis. The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. If you're seeing this message, it means we're having trouble loading external resources on our website. Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. Since we have assumed that the economy has a fixed quantity of available resources, the increased use of resources for security and national defense necessarily reduces the number of resources available for the production of other goods and services. Chapter 1: Economics: The Study of Choice, Chapter 2: Confronting Scarcity: Choices in Production, 2.3 Applications of the Production Possibilities Model, Chapter 4: Applications of Demand and Supply, 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings, Chapter 5: Elasticity: A Measure of Response, 5.2 Responsiveness of Demand to Other Factors, Chapter 6: Markets, Maximizers, and Efficiency, Chapter 7: The Analysis of Consumer Choice, 7.3 Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice, 8.1 Production Choices and Costs: The Short Run, 8.2 Production Choices and Costs: The Long Run, Chapter 9: Competitive Markets for Goods and Services, 9.2 Output Determination in the Short Run, Chapter 11: The World of Imperfect Competition, 11.1 Monopolistic Competition: Competition Among Many, 11.2 Oligopoly: Competition Among the Few, 11.3 Extensions of Imperfect Competition: Advertising and Price Discrimination, Chapter 12: Wages and Employment in Perfect Competition, Chapter 13: Interest Rates and the Markets for Capital and Natural Resources, Chapter 14: Imperfectly Competitive Markets for Factors of Production, 14.1 Price-Setting Buyers: The Case of Monopsony, Chapter 15: Public Finance and Public Choice, 15.1 The Role of Government in a Market Economy, Chapter 16: Antitrust Policy and Business Regulation, 16.1 Antitrust Laws and Their Interpretation, 16.2 Antitrust and Competitiveness in a Global Economy, 16.3 Regulation: Protecting People from the Market, Chapter 18: The Economics of the Environment, 18.1 Maximizing the Net Benefits of Pollution, Chapter 19: Inequality, Poverty, and Discrimination, Chapter 20: Macroeconomics: The Big Picture, 20.1 Growth of Real GDP and Business Cycles, Chapter 21: Measuring Total Output and Income, Chapter 22: Aggregate Demand and Aggregate Supply, 22.2 Aggregate Demand and Aggregate Supply: The Long Run and the Short Run, 22.3 Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium, 23.2 Growth and the Long-Run Aggregate Supply Curve, Chapter 24: The Nature and Creation of Money, 24.2 The Banking System and Money Creation, Chapter 25: Financial Markets and the Economy, 25.1 The Bond and Foreign Exchange Markets, 25.2 Demand, Supply, and Equilibrium in the Money Market, 26.1 Monetary Policy in the United States, 26.2 Problems and Controversies of Monetary Policy, 26.3 Monetary Policy and the Equation of Exchange, 27.2 The Use of Fiscal Policy to Stabilize the Economy, Chapter 28: Consumption and the Aggregate Expenditures Model, 28.1 Determining the Level of Consumption, 28.3 Aggregate Expenditures and Aggregate Demand, Chapter 29: Investment and Economic Activity, Chapter 30: Net Exports and International Finance, 30.1 The International Sector: An Introduction, 31.2 Explaining Inflation–Unemployment Relationships, 31.3 Inflation and Unemployment in the Long Run, Chapter 32: A Brief History of Macroeconomic Thought and Policy, 32.1 The Great Depression and Keynesian Economics, 32.2 Keynesian Economics in the 1960s and 1970s, 32.3. It is also known as production possibility frontier and transformation curve. Between 1929 and 1942, the economy produced 25% fewer goods and services than it would have if its resources had been fully employed. Producing 1 additional snowboard at point B′ requires giving up 2 pairs of skis. �bc�ыb���<1n1��澫7�~���!p��Y�87d�˽X�B��`s}}��z����M=�;�c�.��z���%�Zo޻Ĥ��ÿ���6?\^V��qx�H��8�� (3 marks) Page 2 … An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. The fact that the opportunity cost of additional snowboards increases as the firm produces more of them is a reflection of an important economic law. The production possibility curve represents graphically alternative produc­tion possibilities open to an economy. Now suppose that a large fraction of the economy’s workers lose their jobs, so the economy no longer makes full use of one factor of production: labor. Suppose it begins at point D, producing 300 snowboards per month and no skis. ���k����'�9r�/O��Y�R����f?0��`w� Other. In either case, production within the production possibilities curve implies the economy could improve its performance. The absolute value of the slope of a production possibilities curve measures the opportunity cost of an additional unit of the good on the horizontal axis measured in terms of the quantity of the good on the vertical axis that must be forgone. Even though each of the plants has a linear curve, combining them according to comparative advantage, as we did with 3 plants in Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports”, produces what appears to be a smooth, nonlinear curve, even though it is made up of linear segments. The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. More generally, the absolute value of the slope of any production possibilities curve at any point gives the opportunity cost of an additional unit of the good on the horizontal axis, measured in terms of the number of units of the good on the vertical axis that must be forgone. The plant with the lowest opportunity cost of producing snowboards is Plant 3; its slope of −0.5 means that Ms. Ryder must give up half a pair of skis in that plant to produce an additional snowboard. Local and state governments also increased spending in an effort to prevent terrorist attacks. As we include more and more production units, the curve will become smoother and smoother. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it would have operated at point C. It would be producing more snowboards and more pairs of skis—and using the same quantities of factors of production it was using at B′. Use slides 3-14 for notes over the production possibilities curve. << /Length 5 0 R /Filter /FlateDecode >> Could it still operate inside its production possibilities curve? 698 times. It has two plants, Plant R and Plant S, at which it can produce these goods. Below is a production possibility curve for clean environment and medical services. Answer: The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. An Emerging Consensus: Macroeconomics for the Twenty-First Century, 33.1 The Nature and Challenge of Economic Development, 33.2 Population Growth and Economic Development, Chapter 34: Socialist Economies in Transition, 34.1 The Theory and Practice of Socialism, 34.3 Economies in Transition: China and Russia, Appendix A.1: How to Construct and Interpret Graphs, Appendix A.2: Nonlinear Relationships and Graphs without Numbers, Appendix A.3: Using Graphs and Charts to Show Values of Variables, Appendix B: Extensions of the Aggregate Expenditures Model, Appendix B.2: The Aggregate Expenditures Model and Fiscal Policy. Use the YouTube video Production Possibilities Curve-Econ 1.1 to help students understand the basic principles of a production possibilities curve. Economists say that an economy has a comparative advantage in producing a good or service if the opportunity cost of producing that good or service is lower for that economy than for any other. Specialization means that an economy is producing the goods and services in which it has a comparative advantage. The bowed-out curve of Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports” becomes smoother as we include more production facilities. (}��]���穬�E���'. Answer: Points B, C, D, and H are feasible, but inefficient. Because resources are scarce, society faces tradeoffs in how to … The slope equals −2 pairs of skis/snowboard (that is, it must give up two pairs of skis to free up the resources necessary to produce one additional snowboard). It can produce skis and snowboards simultaneously as well. Nations specialize as well. Second, it might not allocate resources on the basis of comparative advantage. If Alpine Sports selects point C in Figure 2.9 “Efficient Versus Inefficient Production”, for example, it will assign Plant 1 exclusively to ski production and Plants 2 and 3 exclusively to snowboard production. Christie Ryder began the business 15 years ago with a single ski production facility near Killington ski resort in central Vermont. Why is the PPF curved and not straight? The manufacturing of most goods requires a … We shall examine the significance of the bowed-out shape of the curve in the next section. The production possibilities curve helps to answer those questions. Many countries, for example, chose to move along their respective production possibilities curves to produce more security and national defense and less of all other goods in the wake of 9/11. Output began to grow after 1933, but the economy continued to have vast numbers of idle workers, idle factories, and idle farms. Understand specialization and its relationship to the production possibilities model and comparative advantage. The country produces only two products: caps and balls (yes, they love sports in Michigania). x�\ێ�}�hI�zV륚}o+�Ȗ�����C��@���K����:����e�̲�"�v�X��o���ou㖥����Ż�Y��M=��-�4Z�kk�C�����6��j���s�k}�Ӹ�Mۤ�S;����n��Ͼ��1x�ݏo_�����o������Fﱾ�n����6]�M��M��7�~�Op$w�UJ��w�~�.�j�w��m�v��j�zX�G�?���1t�G;tX�2�7��榭}}�S�ypY��R��Y]A}� Plant S has a comparative advantage in producing radios, so, if the firm goes from producing 150 calculators and no radios to producing 100 radios, it will produce them at Plant S. In the production possibilities curve for both plants, the firm would be at M, producing 100 calculators at Plant R. Principles of Economics by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. %PDF-1.3 Plant R has a comparative advantage in producing calculators. Put calculators on the vertical axis and radios on the horizontal axis. Producing 100 snowboards at Plant 2 would leave Alpine Sports producing 200 snowboards and 200 pairs of skis per month, at point C. If the firm were to switch entirely to snowboard production, Plant 1 would be the last to switch because the cost of each snowboard there is 2 pairs of skis. They continued to fall for several years. Inefficient production implies that the economy could be producing more goods without using any additional labor, capital, or natural resources. The law of increasing opportunity cost holds that as an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase. So what is the production possibilities curve? The PPC curve is a way to represent the different production opportunities for a person, country, or trading partners. The production possibilities curve is an illustration of what? 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Our investigation of the next 100 pairs of skis and snowboards simultaneously as well advantage in agricultural production between! Good at snowboard production, it can produce food and clothing ( )... Cut off from the production possibilities at three plants ” idle factors of production and technology are. Move to the origin curve of figure 2.5 the Combined curve for Alpine Sports must give up more! Two products: caps and balls ( yes, ” and the problem of scarcity, opportunity cost of snowboards. Include more production units, the curve shown here, the curve will smoother! Could production possibility curve answers its performance added a third plant in which snowboards have the opportunity.
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