Q1: City A produces either 1 million litres of water per hour or 1 GigaWatt of electricity per hour, City B produces, in the same amount of time, either 1/4 of the water or 1/2 of the electricity of City A.

a/ Draw PPCs and identify which city has an absolute advantage in electricity and water. Explain what you have drawn in words. (5 marks)

b/ What is the price range of electricity and water and which city should provide each (given the above information)? Show all of your working. (5 marks)

c/ Evaluate the statement: City A should introduce a binding price ceiling on water. Explain what the statement means and the economic significance of such a policy. (5 marks)

d/ Each day, the City A requires 12 Gigawatts of electricity and 12 million litres of water. Each day, the City B requires 6 Gigawatts of electricity and 6 million litres of water. What trading will occur to meet the daily consumption of water and electricity in both cities? Explain your working and answer in words. (10 marks)