Question 4 Not yet answeredPoints out of 6 P lag question Entrepreneurs shift ca

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Question 4 Not yet answeredPoints out of 6 P lag question Entrepreneurs shift capital and labor across industries in pursuit of profit. Let's look at 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 questions that follow about these two industries. If the two industries have similar costs, then what must be true about prices in the two industries? O Industry L must have higher prices. Industry H must have higher prices Therefore. all else equal, value must be higher in: O Industry L. O Industry H if labor and capital are moved from Industry L to Industry H. then: ? low.value goods are given up and high-value goods are gained. high-value goods are given up and low-value goods are gained. Let's change gears Suppose instead that the prices in the two industries were identical, not the costs, and that profits are higher in Industry H just as before. In this case. what must be true about the costs in the two industries? O Industry L must have higher costs O Industry H must have higher costs. Therefore. all else equal, it must take labor and capital to produce a unit of output in O more O less If labor and capital are moved from industry L to Industry H. then: O total output falls. O total output rises. Industry L. compared to Industry H.

Explanation / Answer

1. Industry H must have a higher price. This is because Profit = Price - Cost.

So, when costs are equal, the price has to be higher in H in order to have higher profits.

2. Industry H will be of higher value.

3. Low-value goods are given up and high-value goods are obtained. This is because when labours move to a firm with higher profits, their wages will also increase, and thus the income effect will make them consume higher valued products.

4. Industry L must have higher costs. As explained earlier, Profits = Price - Costs, so at given price levels, costs must be higher in lower profit-making industry.

5. more labour and capital

6. total output rises.

Profits helps a firm to grow in its size in a perfectly competitive market, and the costs also increase with size until marginal revenue just equals the marginal cost.

Losses makes a firm reduce its size in a competitive market, and the costs also decrease with size until marginal revenue just equals marginal cost.

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