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23. Industry Supply - Solutions

# 23. Industry Supply - Solutions - Chapter 23 NAME Industry...

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Chapter 23 NAME Industry Supply Introduction. To find the industry supply of output, just add up the supply of output coming from each individual firm. Remember to add quantities, not prices. The industry supply curve will have a kink in it where the market price becomes low enough that some firm reduces its quantity supplied to zero. The series of problems about the garden gnome industry are designed to help you to understand the distinction between the long run and the short run. To solve these problems, you need to pay careful attention to the timing of decisions. In particular, in this problem, units of capital (gnome molds) can be produced and delivered only one year after they are ordered. The last three questions of this chapter apply supply and demand analysis to some problems in the economics of illegal activities. In these examples, you will make use of your knowledge of where supply functions come from. 23.0 Warm Up Exercise. Here are some drills for you on finding market supply functions from linear firm supply functions. The trick here is to remember that the market supply function may have kinks in it. For example, if the firm supply functions are s 1 ( p ) = p and s 2 ( p ) = p 2, then the market supply function is S ( p ) = p for p 2 and S ( p ) = 2 p 2 for p > 2; that is, only the first firm supplies a positive output at prices below \$2, and both firms supply output at prices above \$2. Now try to construct the market supply function in each of the following cases. (a) s 1 ( p ) = p, s 2 ( p ) = 2 p, s 3 ( p ) = 3 p . S ( p ) = 6 p . (b) s 1 ( p ) = 2 p, s 2 ( p ) = p 1. S ( p ) = 2 p for p 1 , S ( p ) = 3 p 1 for p > 1 . (c) 200 firms each have a supply function s 1 ( p ) = 2 p 8 and 100 firms each have a supply function s 2 ( p ) = p 3. S ( p ) = 0 for p < 3 , S ( p ) = 100 p 300 for 3 p 4 , S ( p ) = 500 p 1 , 900 for p > 4 .

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288 INDUSTRY SUPPLY (Ch. 23) (d) s 1 ( p ) = 3 p 12 , s 2 ( p ) = 2 p 8 , s 3 ( p ) = p 4. S ( p ) = 6 p 24 for p > 4 . 23.1 (1) Al Deardwarf’s cousin, Zwerg, makes plaster garden gnomes. The technology in the garden gnome business is as follows. You need a gnome mold, plaster, and labor. A gnome mold is a piece of equipment that costs \$1,000 and will last exactly one year. After a year, a gnome mold is completely worn out and has no scrap value. With a gnome mold, you can make 500 gnomes per year. For every gnome that you make, you also have to use a total of \$7 worth of plaster and labor. The total amounts of plaster and labor used are variable in the short run. If you want to produce only 100 gnomes a year with a gnome mold, you spend only \$700 a year on plaster and labor, and so on. The number of gnome molds in the industry cannot be changed in the short run. To get a newly built one, you have to special-order it from the gnome-mold factory. The gnome-mold factory only takes orders on January 1 of any given year, and it takes one whole year from the time a gnome mold is ordered until it is delivered on the next January 1. When a gnome mold is installed in your plant, it is stuck there. To move it would destroy it.
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