Question

QUESTION 5 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 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 increasing prices result in projects being developed in Fortitude Valley. If 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 profits. Type N for Normal, E for earning Economic or A for zero Accounting

Answer 1

(a)

At present, construction industry is earning normal profits.

Normal profits implies that firms are earning zero economic profit or, at present, price is equal to the average total cost.

Now, demand for residential properties is increasing but supply is constant.

This will lead to increase in price. So, now, price will exceed the average total cost.

When price exceeds average total cost, firms earn more than the normal profit or earns the economic profit.

So,

It is that the existing construction firms in the short-run will now earn E (Economic) profits.

(b)

Current profit per project = $7 million

Percentage increase in profit per project = 8%

Increase in profit per project = $7,000,000 * 0.08 = $560,000

So, profits from each project will increase by $560,000.

The new expected profit from each project would be ($7,000,000 + $560,000) $7,560,000

Hutchinson has 4 projects.

So,

Total profit = $7,560,000 * 4 = $30,240,000 or $30.24 million

Thus,

The Hutchinson's expected profits will total $30.24 million.

(c)

In the long-run, it is expected that the market will readjust resulting in firms N (Normal) profits.