Final answer:
A market price decrease to $12 allows House Depot and Lace Hardware to sell their hammers profitably, but not Bob's Hardware, which needs a minimum of $13. Similarly, businesses adjust production based on cost changes, as with wages or exchange rates affecting imports.
Step-by-step explanation:
When the market price of hammers decreases from $17 to $12, the outcome is that House Depot and Lace Hardware can still offer their hammers, priced at $7 and $10 respectively, and make a profit. However, Bob's Hardware, which offers hammers at a minimum price of $13, now has a price above the market price and would end up with a loss if it attempts to sell at the new market price. Consequently, Bob's Hardware may choose not to sell at the lowered market price unless it can reduce costs or is willing to take a loss.
Similarly to how changes in costs can affect a business's production decisions, in the provided example, when a union negotiates higher wages, the firm might adjust its balance between labor and machines based on the new costs. This decision will also be influenced by the fact that while machines can reduce the reliance on labor, they also do not have purchasing power, which can indirectly affect the demand for the product or service.
Additionally, exchange rates can significantly impact the cost of international transactions as shown in the example with Bass Ale. A weakened dollar increases the cost of importing goods, which could impact a U.S. grocery store's decision to purchase the English ale. If the price becomes too high, the grocery store might look for alternative suppliers.