Question 1: Answer the following questions
Opportunity Cost and Comparative Advantage
Kim can produce 40 pies or 400 cakes an hour. Liam can produce 100 pies or 200 cakes an hour.
(a) Who has a comparative advantage in producing pies and who has a comparative advantage in producing cakes? Explain why.
(b) Initially, both Kim and Liam spent 30 minutes producing pies and 30 minutes producing cakes. However, they now decide to specialise in producing the product that they have a comparative advantage and trade their products in the market. What are the total gains from trade? Explain.
Demand and Supply
The table sets out the demand and supply schedules for potato chips.
(c) What are the market equilibrium price and quantity? Why?
|
Price
(cents per bag)
|
Quantity
demanded
|
Quantity
supplied
|
|
|
(million bagsper week)
|
|
50
|
160
|
130
|
|
60
|
150
|
140
|
|
70
|
140
|
150
|
|
80
|
130
|
160
|
|
90
|
120
|
170
|
|
100
|
100
|
180
|
(d) Suppose a new dip increases the quantity of potato chips that people want to buy by 30 million bags per week at each price. How the demand and/or supply of chips change? Also, explain how the price and quantity of chips change. Show the changes on a graph.
(e) The quantity of potato chips that people want to buy increases by 30 million bags per week at each price.Now suppose, at the same time, a new breed of potato increases production of potato crops and the quantity of potato chips produced increases by 40 million bags a week at each price. Explain how the market equilibrium price and quantity of chips change. What are the new market equilibrium price and quantity? Show the changes on a graph.