ECON 262

Out of Class Practice Problems -- The Supply Curve

Graphically show what will happen in each case (to supply or quantity supplied).  Remember to always assume ceteris paribus unless otherwise noted. Make sure you label your axes correctly !!

1.  Assume plastic is used to make Tupperware.  What will happen to the supply or quantity supplied of Tupperware if the price of plastic decreases?

2.  Assume a new technology is developed in producing radios.  What will happen to the supply or quantity supplied of radios?

3.  Assume the wages of carpenters increases.  What will happen to the supply or quantity supplied of houses? (Hint:  carpenters make houses).

4.  Assume black pens and green pens are substitutes in production.  What will happen to the supply or quantity supplied of black pens if the price of green pens increases?

5.  Assume lumber and wood chips used in gardens are complements in production.  What will happen to the supply or quantity supplied of wood chips if the price of lumber decreased?

6.  Assume the price of telephones increases.  What will happen to the supply or quantity supplied of telephones?

7.  Assume lemons are used to produce lemon pie.  Also assume the government subsidizes the production of lemon pies (certain people in congress love lemon pie - and get campaign funding from lemon pie makers).  What will happen to the supply or quantity supplied of lemon pies if the price of lemons increased and at the same time, the subsidy increased?

8.  Assume a new technology is developed in the production of calculators.  Also assume that the profitability of calculators (relative to computers) increases.  What will happen to the supply or quantity supplied of calculators if the technology takes place and at the same time the profitability of calculators increases?

Out of Class Practice Problems -- The Supply Curve 

ANSWERS - These answers are only explanations of how you should have drawn your graphs. 

1.  Assume plastic is used to make Tupperware.  What will happen to the supply of Tupperware if the price of plastic decreases?

Answer:  The supply curve for Tupperware will shift to the right.  Plastic is a resource -- it's price went down so the suppliers can buy more plastic, and therefore produce more Tupperware.

2.  Assume a new technology is developed in producing radios.  What will happen to the supply of radios?

Answer:  The supply curve for radios will shift to the right.  By definition, a new technology will allow the suppliers to produce more radios at the same cost.

3.  Assume the wages of carpenters increases.  What will happen to the supply of houses? (Hint:  carpenters make houses - they are an input and you are the person that hires them).

Answer:  The supply curve for houses will shift to the left.  Carpenters are a resource -- their wages went up, therefore builders can't hire as many carpenters and therefore can't build as many houses.

4.  Assume black pens and green pens are substitutes in production.  What will happen to the supply of black pens if the price of green pens increases?

Answer:  The supply curve for black pens will shift to the left.  Since the price of green pens has increased, suppliers will want to produce more of them and get out of producing black pens (since green pens are more profitable now, ceteris paribus).

5.  Assume lumber and wood chips used in gardens are complements in production.  What will happen to the supply of wood chips if the price of lumber decreased?

Answer:  The supply curve for wood chips will shift to the left.  Since the two goods are produced together and the price of lumber decreased, the suppliers will produce less lumber and therefore (also) fewer wood chips.

6.  Assume the price of telephones increases.  What will happen to the quantity supplied of telephones?

Answer:  The supply curve for telephones will NOT shift since the variable changing is on an axis (the price of telephones has already been plotted along the supply curve).  Since the price of telephones is increasing, you would move along the supply curve and show with an arrow that you are increasing quantity supplied of telephones (→).

7.  Assume lemons are used to produce lemon pie.  Also assume the government subsidizes the production of lemon pies (certain people in congress love lemon pie - and get campaign funding from lemon pie makers).  What will happen to the supply or quantity supplied of lemon pies if the price of lemons increased and at the same time, the subsidy increased?

Answer:  The supply curve for lemon pies will shift to the left since the price of lemons (a resource) has increased.  The supplier can't buy as many lemons (ceteris paribus) and therefore can't supply as many lemon pies.  Also, since the government is subsidizing the production of lemon pies, making them "cheaper" to produce, the supply of lemon pies will increase (this will shift the supply curve to the right).  Since we do not know the magnitude of the two shifts, we don't know if supply (after both changes have occurred) has increased or decreased on net.

8.  Assume a new technology is developed in the production of calculators.  Also assume that the profitability of calculators (relative to computers) increases.  What will happen to the supply or quantity supplied of calculators if the technology takes place and at the same time the profitability of calculators increases?

Answer: The supply curve for calculators will shift to the right since the new technology allows the producer to produce more calculators even when selling them for the same price (since technology lowers their costs of production).  Also, the supply curve for calculators will shift to the right again since their profitability has increased relative to computers.  This means that the opportunity cost of producing calculators has decreased (if we assume that some suppliers who make calculators could make computers instead). Two shifts to the right - supply has increased.