MODERNPRINCIPLES:MICROECONOMICS1212MODERNPRINCIPLESOFECONOMICSCompetition and the Invisible HandFacts and Tools1.Entrepreneurs shift capital and labor across industries in pursuit of profit. Let’s lookat this a little more closely. Suppose there are two industries: a high-profit industry,Industry H, and a low-profit industry, Industry L. Answer the following questionsabout these two industries.a.If the two industries have similar costs, then what must be true about prices inthe two industries?b.What does your answer to part a imply about the value of the output in the twoindustries?c.If labor and capital are moved from Industry L to Industry H, what is given up?What is gained?d.Suppose instead that the prices in the two industries were identical. In this case,what must be true about the costs in the two industries?e.What does your answer to part d imply about the amounts of capital and laborrequired to produce one unit of output in each industry?f.If labor and capital are moved from Industry L to Industry H, are more units ofoutput lost in Industry L or gained in Industry H?1. a.For profits to be higher in Industry H, the price in Industry H would have to behigher than in Industry L.b.The value in Industry H must be higher than the value in Industry L.c.If labor and capital moved from Industry L to Industry H, then low-value goodsare given up and high-value goods are gained.Solution
S-12.Suppose that two industries, the pizza industry and the calzone industry, are equallyrisky, but rates of return on capital investments are only 5% in the pizza industryand 8% in the calzone industry.Which way will capital flow—from the pizza industry to the calzone industry, orfrom the calzone industry to the pizza industry?2.Capital will flow from the pizza industry to the calzone industry.SolutionS-1Cowen3e_CH12_Solutions.indd126/06/157:41 PM
