Essay: Profit Optimization and Resource Allocation in Business Strategies

1. Assume that a business firm finds that its profit is greatest when it produces $140 worth of product X. Suppose also that each of the three techniques shown in the table will produce the desired output. 

a) Given the factor prices shown, which technique will the firm choose? Why?

b) What are the profits/losses in this industry and will the industry expand or contract?

c) Suppose a new technique is developed that requires 4 units of labour, 4 units of land, 12 units of capital, and 6 units of materials. Will producers adopted the new technique? Why or why not?

d) Suppose that the price of labour falls to $3 but the prices of other resources remain unchanged. Will the change affect producers’ decisions? Why or why not? (for this part you may assume that the producers have four techniques available).

2. The following table shows the demand and supply schedules for rental apartments in the city of South Bay.  

a) What are the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?

b) If the municipal government can enforce a rent-control law that sets the maximum monthly rent at $1500, will there be a surplus or a shortage and if so, how large will it be?

c) Suppose that a new government wants to help renters by lowering the maximum rental price to $1000 per month. What effect will this change have on the market?

d) Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply of housing. Assuming that demand remains unchanged, by how many units of public housing would the government have to provide in order to increase thesupply of housing so that the market equilibrium rental price is $1000 per month? 

3. Suppose that apple producers in New England experience unusually good weather and so produce a larger than normal harvest. Explain using a diagram how this harvest will affect Canadian apple producers?

4.Consider the perfectly competitive timber industry. It is initially in long run equilibrium at quantity Q0 and price P0.

a) Draw a supply and demand diagram for the timber market showing this equilibrium.

b) Draw a diagram for a typical logging firm in its initial long run equilibrium, showing its Marginal Cost, Average Total Cost, and Long Run Average Cost curves. Are any profits being made by this firm?

c) A major use for timber is the creation of paper products. Suppose that a ban on disposable plastic shopping bags substantially increases demand for paper bags. What happens to your diagram in part (a)? Use your diagram from part (b) to show how the firm reacts to this new situation. Are any profits being made by this firm?

d) Explain how this industry adjusts to its new long run equilibrium using both the diagrams from parts (a) and (b). (You may assume that it is a constant cost industry

5.Answer the following questions:

a.Explain why zoning laws, which allow certain land uses only in specific locations, might be justified in dealing with a problem of negative externalities.

b)Explain why in areas where buildings sit close together tax breaks to property owners for installing extra fire prevention equipment might be justified in view of positive externalities.