Kim can produce 100 pies or 400 cakes an hour. Liam can produce 150 pies or 300 cakes an hour.

a) If Kim and Liam spend 30 minutes of each hour producing pies and 30 minutes producing cakes, how many pies and cakes does each of them produce?

b) Calculate opportunity cost of producing pies and cakes for Kim and Liam.

c) Determine comparative advantage for each product and decide who should make pies and who should make cakes? Explain why.

d) If Kim and Liam specialise and trade, what is the highest price of a pie at which Kim and Liam would agree to trade pies and cakes? What are the gains from trade?