S. Klepper, Economics 73-100, Fall 2011
Suppose that in the last year the wage rate of laborers working in the milk industry increased by 10% and the cost of a plant required to produce milk increased by 30%. 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 10% to compensate for the 10% 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 10% at every level of output.
_____2. Every milk producer that previously produced a positive quantity of milk will continue to produce a positive quantity of milk after the cost and price increases.
_____3. The average total cost of milk production will increase by more than 10% at every level of output.
_____4. The market supply curve of milk producers will be the same as before the cost and price increases.
_____5. Milk producers will reduce the quantity of milk they produce after the cost and price increases.