In an hour, Sue can produce 40 caps or 4 jackets and Tessa can produce 80 caps or 4 jackets.

1. Does either Sue or Tessa have an absolute advantage?
2. Who has a comparative advantage in producing caps and in producing jackets?
3. If Sue and Tessa specialise and trade, who will gain? Explain using PPF diagrams for before and after trade.

The demand functions for each of two goods, gasoline (g) and biogas (b), depend on the prices of both the goods, Pg and Pb. Their demand functions are Qg = 975 - Pg + 0.5Pb and Qb = 600 - Pb + 0.5Pg. However, the supplies are fixed in the short run with Qg = 75 and Qb = 300.

1. What are the equilibrium prices of gasoline and biogas?
2. What if a new discovery of gasoline doubles the quantity supplied to 150? How will this affect the prices of both gasoline and biogas?
3. What are the short term own price and cross price elasticities of demand and supply at the equilibrium point in part a? How does your answer change for part b?
4. Draw a graph to illustrate your answers in a-c.