The hobbits of the Shire are trying to decide how much bread and how much wine to produce. Table 1 shows the different combinations of wine and bread that they can produce if they are fully employed and doing their best. The second table shows their willingness to pay for wine depending on how much they already have.

Combination Wine(thousands of bottles per year) Bread(thousands of loaves per year)

A 0 21

B 2 20

C 4 18

D 6 15

E 8 11

F 10 6

G 12 0

Wine(thousands of bottles per year) Willingness to pay(thousands of loaves per year)

1 2.5

3 2.0

5 1.5

7 1.0

9 0.5

A) Draw the Shire's production possibility frontier. Put wine on the horizontal axis.

B) What is the opportunity cost of the first two thousand(2000) bottles of wine? What is the marginal cost of the 3000th bottle of wine? What is the marginal cost of the 3000th loaf of bread?

C) Draw the marginal cost of wine curve. What happens to the marginal cost if production of wine increases?

D) Draw the marginal benefit from wine curve on the same figure on which you put the marginal cost curve. Describe the relationship between the quantity of wine produced and the marginal benefit from wine.