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
– 3 Series convertibles.
Regensburg, Germany
Resources
Workers
machinery, materials,
entrepreneurial skills
Etc.
Production
a) Production Possibility Frontier
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.

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
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?
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.
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?