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. (5 marks)
(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. (3 marks)