Question 1: Per hour, Kim can produce 40 pies OR 400 cakes, whilst Liam can produce 100 pies OR 200 cakes. a. Calculate Kim’s and Liam’s opportunity costs of producing one pie. Kim’s opportunity cost of producing a pie is 400/40 = 10 cakes per pie. Liam’s opportunity costs of producing a pie is 200/100 = 2 cakes per pie b. If Kim and Liam spend 30 minutes of each hour producing pies and 30 minutes producing cakes, how many pies and cakes does each of them produce? Kim produces 20 pies and 200 cookies. Liam produces 50 pies and 100 cookies. The total number produced is 70 pies and 300 cookies c. Who has a comparative advantage in producing pies? In cakes? Liam has the comparative advantage in producing pies because his opportunity cost of a pie is less than Kim’s opportunity cost. Kim has the comparative advantage in producing cakes because her opportunity cost of a cake is less than Liam’s opportunity cost. d. Draw Kim’s PPF and Liam’s PPF on separate graphs.

KIM’s PPF

50

40

30

20

10

100 200 300 400 500

LIAM’s PPF

125

100

75

50

25

100 200 300 400 500

e. On your graphs, show the point at which each produces when they spend 30 minutes each hour on pies, and 30 minutes each hour on cakes. The Blue points Refer to the above graph in d. answered

f. Show what each produces when they (completely) specialise in what each has a comparative advantage. Kim will specialize in cakes and Liam will specialize in pies. The Red points in both graph in d. answered shows the production points when each of them specializes.

g. When they specialise and trade, what are the total gains? As Kim specialized in cake and Liam specialized in pie. When they specialized and trade the outcome production of both pie and cake will be increase, as when they spend 30 minutes for produce pie and another 30 minutes for cake,...

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