(a) Identify the slope of the supply curve.
The supply curve is -45 + 4.5P
(b) Outline the reason why the Qs increases as the price increases.
· At a higher price, the profit margin is greater, so there is an incentive to produce and offer more units. (my favorite)
· As price increases, profits will be maximized at a higher level of output given an upward-sloping MC curve
· As marginal costs rise, a firm will be willing to offer more units per period on;y at a higher price.
An increase in the costs of production has resulted in a new supply function:
Qs = -60 +3P
(c) Draw and label the new supply curve on figure 1
Step 1. Make Qs zero and solve
Step 2. Make P zero and solve
Step 3. Plug in a number and solve
Step 1
Qs (0) = -60 + 3P
Qs (0) = -60 + (3 x 20)
Qs (0) = -60 + 60
When P = 20, at a price of 20 there will be zero (0) units supplied
Step 2
Qs = -60 + (3 x 0)
Qs = -60
When P = 0, at a price of zero there will be -60 units supplied
Step 3
Qs = -60 + 3P
Qs = -60 + (3 x 60)
Qs = -60 + 180
Qs = 120
When P = 60, there will be 120 units supplied
What if we chose a price of 80 and solved
Qs = -60 + 3P
Qs = -60 + (3 x 80)
Qs = -60 + 240
Qs = 180
When P = 80, there will be 180 units supplied
 |
| Notice that as the cost of goods increase the supply curve shifts to the left |
· An increase in the costs of production will reduce profitability, causing producers to be less willing to supply units of this good.
· An increase in costs of production will increase the price at which producers will be willing to supply the same quantity.
(e) Calculate the change in producer surplus resulting from the increase in costs of production.
PS #1 = 20 x 90,000/ 2 = 900K
PS #2 = 20 x 60,000/ 2 = 600K
A decrease of 300,000 in Producer Surplus
No comments:
Post a Comment