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ECON111

ECON111. Tutorial 2, Week 3 Economic Problem. Question 1. BMW operates a car factory in Regensburg, Germany where it produces a number of models using its resources – workers, machinery, materials, and entrepreneurial skills. Suppose BMW produces two models : Z4 Roadsters

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ECON111

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  1. ECON111 Tutorial 2, Week 3 Economic Problem

  2. Question 1 • BMW operates a car factory in Regensburg, Germany where it produces a number of models using its resources – workers, machinery, materials, and entrepreneurial skills. • Suppose BMW produces two models: • Z4 Roadsters • 3 Series convertibles.

  3. Regensburg, Germany Resources Workers machinery, materials, entrepreneurial skills Etc. Production

  4. a) Production Possibility Frontier

  5. b) Trade-off • There is a limit to what we can achieve, given the existing resources. • Every choice made has an opportunity cost—we can get more of something only by giving up something else.

  6. To produce more Convertible we have to produce less Roadster. From B to C: To increase production of Convertible from 400 unit to 500 unit we have to decrease the production of Roadster from 600 unit to 400 unit. The opportunity cost of 1 convertible is 2 Roadster

  7. c). Technological advance • Suppose that technological advance occurs that affects the production of Z4 Roadsters, but not 3 Series convertibles. • Show the effect on the PPF. • Does such a technological advance (in the production of Z4) allow more 3 Series to be produced for any given level of Z4 production? • If so, how?

  8. Biased Technological Change Technological progress allows the same quantity of Z4 to be produced with fewer resources, then… there are indeed more resources available to produce 3 Series, at any given level of Z4.

  9. Question 2 Kim can produce 40 pies an hour or 400 cookies an hour. Liam can produce 100 pies an hour or 200 cookies an hour. a. Calculate Kim’s opportunity cost of producing a pie. b. Calculate Liam’s opportunity cost of producing a pie. c. Who has a comparative advantage in producing pies? Who has the comparative advantage in producing cookies? d. If Kim and Liam spend 30 minutes of each hour producing pies and 30 minutes producing cookies, how many pies and cookies does each of them produce? e. Suppose that Kim and Liam increase the time they spend producing the good in which they have a comparative advantage by 15 minutes. What will be the increase in the total number of pies and cookies they produce? f. What is the highest price of a pie at which Kim and Liam would agree to trade pies and cookies? g. If Kim and Liam specialise and trade, what are the gains from trade?

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