Part A: Over the past few years, Australian residential properties have attracte
ID: 1143390 • Letter: P
Question
Part A: Over the past few years, Australian residential properties have attracted considerable interest from foreign investors. This has resulted in a significant increase in the number of new apartment developments, particularly in Fortitude Valley and Newstead.
Answer the following questions:
a. Assume that the residential construction industry was earning normal profits prior to the increase in demand for residential properties from foreign investors. If no new construction firms enter the market, it is likely that the existing construction firms in the short run will now earn____E?_____ profits. Type N for Normal, E for Economic, or A for no accounting.
b. Assume Hutchinson Builders currently generates an average of $7 million profit per project it constructs in Fortitude Valley. The company currently has 4 projects being developed in Fortitude Valley. If increasing prices result in profits per project increasing by 8%, then Hutchinson’s expected profits will total $____________ million. Answer to two decimal places.
c. In the long run it is expected that the market will readjust resulting in firms earning _____N?______ profits. Type N for Normal, E for Economic or A for zero Accounting.
3 points
Part B: Facebook’s membership grew from 34 million at the beginning of 2008 to over 600 million by January 2011. The site dominates the online social networking market, out-performing rivals Twitter and My-Space.
1. The growth of Facebook can in part be explained by network externalities.
2. Facebook becomes more valuable to each user as the total number of users increases.
3. Facebook will be certain to dominate this market now that it has an entrenched position.
Which of the above statements are true:
a. Only 1 is true.
b. Only 2 is true.
c. Both 1 and 2 are true.
d. Both 2 and 3 are true.
e. All three are true.
a. Only 1 is true.
b. Only 2 is true.
c. Both 1 and 2 are true.
d. Both 2 and 3 are true.
e. All three are true.
Explanation / Answer
(PART - A)
(a) E
When demand increases, demand curve for residential properties shifts rightward, increasing price and increasing quantity, increasing total revenue. Ceteris paribus, this will increase profit. Since firms were earning normal profit, an increase in profit will mean firms can earn economic profit now.
(b) $30.24 million
New profit per project = $7 million x 1.08 = $7.56 million
Expected total profit for 4 projects = $7.56 million x 4 = $30.24 million
(c) N
In the long run, new firms will enter the market by being attracted by short run profits, increasing market supply and decreasing market price and decreasing individual firm's demand. As a result, firm's economic profit will start falling until new long-run equilibrium is established when each firm earns zero economic profit (i.e. normal profit only).
NOTE: As per Answering Policy, 1st question has been answered.