Explain under what conditions supply is very inelastic and elastic.
What will be an ideal response?
Elasticity of supply measures the change in quantity supplied in response to a change in price. The law of supply states that ceteris paribus, as the price of a good rises, producers will respond by producing or selling more goods because the higher price gives them an incentive to do so. The question with elasticity of supply is how much quantity supplied will go up. If supply is very inelastic, the supply curve is very steep, and quantity supplied cannot increase much in response to a higher price. For example, Texas natural gas producers cannot respond rapidly to a price increase if they do not immediately have the equipment or labor to increase production. In contrast, if supply is elastic, producers can respond quickly to a change in price. If the price of pizzas increases, a local pizza restaurant can easily produce more.
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All of the following are disadvantages of cost-plus pricing except
A) Allocating and apportioning business overheads to individual products could be somewhat arbitrary. B) If the industry comprises identical firms (with identical costs), markups could be consistent among firms leading to no one firm having a competitive edge in terms of price. C) It ignores the price elasticity of demand: for example, it may be possible to increase profits by raising or lowering price. D) The business has less incentive to cut or control costs: if costs increase, then selling prices increase. Consequently, this might further erode a firm's competitiveness.
In Example 6.5 in the book, the authors use the observed production data from the U.S. carpet industry to show that small firms likely have constant returns to scale and that large firms likely have increasing returns to scale
Are returns to scale in this industry likely to continue increasing as these firms become even larger? A) Yes, the marginal products of labor and capital are known to be positive at all levels of output in the U.S. carpet industry, which implies continued increasing returns to scale. B) Yes, increasing returns are always observed in other countries that produce carpeting on large scale. C) No, the authors predict that returns to scale in carpet production will likely decline at some point. D) The authors do not provide any comments on this issue.
Which of the following supply shocks would shift the aggregate supply curve inward?
What will be an ideal response?
If society will gain by producing less X, then it must be the case that currently
A. PX < MCX. B. PX = MCX. C. either PX > MCX or PX < MCX. D. PX > MCX.