Question 3:

Cakes & Pies Lewis and Cleo are neighbors who both enjoy baking. Working on his own, Lewis can produce 12 cakes or 4 pies in a week, and usually makes 6 cakes and 2 pies. Cleo, on her own, can produce 3 cakes or 9 pies in a week, and usually makes 1 cake and 6 pies.

a. Graph both Lewis and Cleo's respective PPCs. Indicate the points at which they are producing/consuming.

b. Who has comparative advantage in making cakes? And in making pies?

c. If Lewis and Cleo decide to specialize and trade, what should the terms of trade be?

d. What would the gains from trade be for Lewis and Cleo? Indicate their new points of consumption

on their PPCs, demonstrating how each are made better off by trade.