ECON 361 - Practice Problem - Supply Analysis

1.  Assume your analysts have calculated the following supply function for your firm (you sell specialty lemonade).

Qs = -150 + 50P

a.  At what price would Qs = zero?

Graph this situation from above.

b.  What would producer surplus be at $4?  Put all of your numbers on your graph above and shade in the producer surplus.

c.  Now let's add some more variables.  Assume w = wage factor, t = technology, Pka = price of "kool" aid - a substitute in production

So:  Qs = -150 + 50P - 2W + 1t - 4Pka

w = 3, t = 4, and Pka = 2

Calculate your shortened version of your supply curve.

d. If Pka decreased to 1, how would your supply curve (shortened version) change?  Calculate.

e.  Graph both curves (showing price where Qs = zero for both) - show an arrow of direction of change.

f. Does the shift make sense?

Answers (except graphs):

a.  P = $3

b.  Producer surplus would be 25.

c.  Shortened version = Qs = -160 + 50P

d.  Qs = -156 + 50P

e.  Your P's where Qs is zero should be:  P = $3.20  and P = $3.12  So you should shift the curve to the right.

f.  It does make sense.  Kool aid is a substitute in production.  When it's price decreases it becomes less profitable - relatively speaking (ceteris paribus), therefore, you want to produce less of it and more of the other good (your lemonade).