S. Klepper, Economics 73-100, Fall 2009

Mini-test 4

Suppose that in the last year the wage rate of laborers working in the milk industry increased by 20% and the cost of a plant required to produce milk did not change. Labor is the only variable input in production and the plant is the only fixed cost of production. The price of milk is regulated by local boards. Suppose that boards allowed the price of milk to rise by 20% to compensate for the 20% increase in wages.

Which of the following statements correctly describe the effects of the cost and price increases in the short run? Mark true for a correct answer and false for an incorrect one and provide explanations for each of your answers.

_____1. The marginal cost of milk production will increase by 20% at every level of output.

_____2. Some milk producers that produced a positive level of milk before the cost and price increases might stop producing milk (but still maintain their plants and thus incur the costs of the plants).

_____3. The average total cost of milk production will increase by 20% at every level of output.

_____4. The market supply curve of milk producers will shift to the left.

_____5. Milk producers that continue to supply milk will produce the same amount of milk as before the cost and price increases.