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Question

(a) Apply the geometric method to determine the elasticity of supply at point L on the supply curve SS given above.

(b) Jusify the statement, 'In economics, normal profits are always a part of total cost'.


Solution

(a) Es at point L=Supply Curve intercept on X axisSupply at point L

Draw a perpendicular from point L on the axis, say at OQ,

The intercept of the supply curve coincide with the origin.

Therefore, Es at point L=OQOQ=1

(b) The given statement is correct.

Normal profit is defined as the minimum reward that is just sufficient to keep the entrepreneur supplying his factor service Since total cost includes payment made to primary inputs: land, labour, capital and enterprise, total cost includes rent, wages, interest and (normal) profits.

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