Explain what will happen to the price

Reference no: EM131038900

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.

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.

Reference no: EM131038900

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