The "Joe and Bob" Bread Company provide loaves of bread. On the first of each month they buy the necessary ingredients to make their bread. On April 1 "Joe and Bob" get a great deal onwheat(animportantinputinmakingbread)andpurchase1million(1,000,000)bushelsof wheat at $2 per bushel. One bushel of wheat can produce 2 loaves of bread. "Joe and Bob" sell 500,000 loaves of bread in April at $3 per loaf. This results in an economic profit of $125,000 in the month of April.Unfortunately,adroughtinAprilcausesthemarketpriceofwheatto increaseto$3abushelinMay.All other input costs remainthesame.Fortunately, "Joe and Bob" still have wheat leftover from April so they do not have to buy wheat on May 1.

a. Assumingthat"JoeandBob"sell500,000loavesofbreadinMayat$3perloaf,what will their economic profits be?

b. Assumingthat"JoeandBob"havemarketpower(inotherwords,adownwardsloping demand curve), have they maximized their profits in May?If not, how should they adjust their price or quantity?