onsider two producers, Maria and Maya. Maria can produce 15 Pizzas per day or 45 Pies, whereas Maya can produce 20 Pizzas per day or 40 Pies. This information is summarised in the following table: Output per producer Maria Maya Pizzas 15 20 Pies 45 40 (a) Which producer has an absolute advantage in the production of Pizzas? Which producer has an absolute advantage in the production of Pies? Explain your answer. (b) Which producer has a comparative advantage in the production of Pizzas? What about Pies? Explain and show your workings. (c) Assume that if Maria and Maya did not trade with each other, they would each spend the first half of each day producing Pizzas and the second half producing Pies. Using this information, demonstrate how Maria and Maya can benefit from specialisation and trade.

Question 2 Assume Bruno is a landowner and Angela is the farmer working on his land. (a) Using Angela and Bruno's feasible frontier and Angela's biological constraint, illustrate and clearly label the technically feasible set. What allocation point is likely to be chosen by Bruno under coercion and why? (b) On a new diagram illustrate the allocation chosen if there is bargaining between Angela and Bruno. Explain whether Angela receives a larger share of economic rent as a result of bargaining? (c) On your diagram from part (b) clearly indicate the allocation that Angela would receive if she was the owner working on her own land. Is there any difference in Angela's working hours and economic rent that she would receive if she was the owner, as compared to bargaining?

Question 3

Assume that the market for potatoes is competitive (i.e., there are many buyers and sellers). (a) Using the supply and demand model illustrate equilibrium in the market for potatoes assuming that demand is less elastic than supply. Explain whether the equilibrium achieved in this market is Pareto efficient. (b) Assume that a per unit tax is applied to the sellers of potatoes. Keeping the difference in elasticities the same as in part (a), on a new diagram show the price paid by the buyers and the price received by the sellers, and also show the quantity bought and sold after tax. (c) On your diagram from part (b) label the consumer burden of tax and the producer burden of tax. Who pays the larger share of this tax and why? Explain whether the market outcome after tax is Pareto efficient?

Question 4 Assume that the producer of beautiful cars is a monopoly (i.e., there is only one seller in the market). (a) Illustrate this monopoly seller on a diagram clearly labelling the price and quantity chosen by this seller. Explain how this car producer chooses the price to charge for its cars and the appropriate quantity to sell. (b) On your diagram from part (a) clearly label consumer surplus, producer surplus and the dead weight loss. Explain whether this car market outcome is Pareto efficient? (c) Briefly explain any three qualities of the price-setting firm.

Question 5 (a) Explain the difference between the nominal wage and the real wage. Using a wage-setting curve and price- setting curve diagram, explain how the real wage determines the equilibrium level of employment in the economy. (b) On a new wage-setting curve and price-setting curve diagram, illustrate the change to the equilibrium level of employment if there is a reduction in education and training opportunities. Clearly state what will happen to the real wage and the level of unemployment. (c) Suppose an economy has low aggregate demand with high unemployment. With the aid of a new wage- setting curve and price-setting curve diagram, explain how the economy could automatically adjust back to equilibrium under these circumstances. Would this occur in reality? Justify your answer.