18eKeyQuestionAnswers_Ch02

18eKeyQuestionAnswers_Ch02 - 2-8(Key Question) With current...

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Unformatted text preview: 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 firms 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 RevenueTotal Cost = Presource* Qresourceand Total Revenue = Price * QsoldTotal 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...
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18eKeyQuestionAnswers_Ch02 - 2-8(Key Question) With current...

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