Econ 561 Profit Analysis Question 2 LO3

Topics: Economics, Scarcity, Profit Pages: 3 (673 words) Published: April 9, 2014
2-8(Key Question) With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also, assume that the least-cost combination of resources in producing those loaves is 5 units of labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. If the firm can sell these 400 units at $2 per unit, will it continue to produce banana bread? If this firm’s situation is typical for the other makers of banana bread, will resources flow to or away from this bakery good?

Total Profits = Total Cost – Total Revenue
Total Cost = Presource * Qresource and Total Revenue = Price * Qsold
Total Cost = ($40 * 5 units of labor) + ($60 * 7 units of land) + ($60 * 2 units of capital) + ($20 * 1 unit of entrepreneurial ability) = $200 + $420 + $120 + $20 = $760.
Total Revenue = $2 * 400 loaves of banana bread = $800.
Total Profits = $800 - $760 = $40. The firm will continue to produce as it is earning economic profits. If this firm is typical of the banana bread industry, more resources will flow toward banana bread as other potential firms are attracted to the economic profits in the industry. 2-9 (Key Question) Assume that a business firm finds that its profit it greatest when it produces $40 worth of product A. Suppose also that each of the three techniques shown in the table on page 43 will produce the desired output.

Resource Units Required

Resource
Price per unit
of resource
Technique
1
Technique
2
Technique
3

Labor
Land
Capital
Entrepreneurial
ability
$3
4
2
2

5
2
2
4
2
4
4
2
3
2
5
4
a.With the resource prices shown, which technique will the firm choose? Why? Will production entail profit or losses? What will be the amount of profit or loss? Will the industry expand or contract? When will that expansion end? b.Assume now that a new...
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