S. Klepper, Economics 73-100, Fall 2008

Solution to Mini-test 4

The increase in wage rates of 20% increases the average variable cost of steel producers by 20% at every level of output. This causes marginal cost to rise by 20% at every level of output. Since fixed costs are unchanged, average total cost rises by less than 20% at every level of output. The effect of the shift in marginal cost on the market supply curve is pictured below. The supply curve shifts to the left, causing the quantity supplied at each price to decline. If the price increases by only 10%, the quantity supplied must decrease, as pictured below by the decrease in the quantity supplied from q₀ to q₁ at the price of 1.1p₀. The extent of the fall in the quantity supplied will not generally equal 20%, but will depend on the shape of the supply curve.

Based on this description, the answers to the individual questions are:

_____1. False

_____2. True

_____3. True

_____4. False

_____5. False