Suppose Cathy and Lewis work in a bakery making pies and cakes. Suppose it takes Cathy 1.5 hours to make a pie and 1 hour to make a cake, and suppose it takes Lewis 2 hours to make a pie and 1.5 hours to make a cake. Which of the following statements is correct?
A. There are no gains from specialization and trade.
B. Cathy should specialize in both pies and cakes.
C. Cathy should specialize in pies, and Lewis should specialize in cakes.
D. Lewis should specialize in pies, and Cathy should specialize in cakes.
Answer: D
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The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be:
A) 2 lemonades for each popcorn. B) 1 lemonades for each popcorn. C) 1/2 lemonade for each popcorn. D) indeterminate unless more information on Fred's marginal utilities is provided.
Suppose you found $1,000 hidden in your mattress and deposited it in a demand deposit account at your bank. If the reserve requirement was 20 percent, the deposit would directly create ____ in excess reserves and ultimately lead to a ____ total increase in the money supply, if all banks in the system lend out 100 percent of their excess reserves
a. $800; $4,000 b. $800; $5,000 c. $1,000; $4,000 d. $1,000; $5,000
The accompanying figure shows Avery's weekly production possibilities curve for scarves. 
Avery's PPC would shift outward if she:
A. devotes more time to knitting each week. B. devotes less time to knitting each week. C. knits more red scarves and fewer blue scarves each week. D. knits fewer red scarves and more blue scarves each week.
Assuming that labor is the only variable input with a fixed production facility, explain the relationship between the marginal product of labor and the marginal production cost.
What will be an ideal response?