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

1a. Calculate Sue's opportunity cost of producing a cap.

1b. Calculate Tessa's opportunity cost of producing a cap.

1c. Who has a comparative advantage in producing caps?

1d. If Sue and Tessa specialize in producing the good in which they have a comparative advantage

and then trade 1 jacket for 15 caps, who gains?

Suppose that Tessa buys a new machine that enables her to make 20 jackets an hour. (She can

still make only 80 caps per hour.)

2a. Who now has a comparative advantage in producing jackets?

2b. Can Sue and Tessa gain from trade?

2c. Would Sue and Tessa still be willing to trade 1 jacket for 15 caps? Explain answer.