Answers to Exercise 3
From the text, End of Chapter 2, questions 8 and 9
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
labour, 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?
The firm will continue to produce as it is earning economic profits of $40 (Total revenue of $800
minus total cost of $760). If this firm is typical, more resources will flow toward banana bread as
other potential firms are attracted to the economic profits.
2-9 (Key Question) Some large hardware stores such as Canadian Tire boast of carrying as many as 20,000
different products in each store. What motivated the producers of those individuals to make them and
offer them for sale? How did producers decide on the best combinations of resources to use? Who
made these resources available, and why? Who decides whether these particular hardware products
should continue to be produced and offered for sale?
The quest for profit led firms to produce these goods. Producers looked for and found the least-
cost combination of resources in producing their output. Resource suppliers, seeking income,
made these resources available. Consumers, through their dollar votes, ultimately decide on what
will continue to be produced.
Demand and supply questions:
Using a demand and supply diagram, show the impact of the following:
1. an increases in wood prices on the market for new houses;
First notice how the vertical
axis is labelled. The demand Price of new
and supply of new houses houses
shows the relationship ($/unit) New Supply
between the price and
quantity of new houses.
Wood is an input into the P2
production of new houses. A
change in the price of an
input affects the supply curve.
Input prices are a
determinant of supply, NOT a
determinant of demand.
Consumers of new houses
respond to the change in the
price of the new houses not to
the change in the price of Q u a n t i t y o
wood. When the price of new
houses increases, we illustrate the decrease in QUANTITY demanded by moving up along
the demand curve to the new equilibrium. There is no shift in the demand curve. 2. a decrease in income Price ofnew
on the market of new new clothes
are a normal
Q u a n t i t y o
( u n i t s / t i m e
Price of new
3. an increase in printers’