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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Many small boats are made of fiberglass and a resin derived from crude oil. Suppose that the price of oil rises.

a. Using diagrams, show what happens to the cost curves of an individual boat-making firm and to the market supply curve.

b. What happens to the profits of boat makers in the short run? What happens to the number of boat makers in the long run?

Subpart (a):

To determine
The impact of increasing price.

Explanation

Figure – 1 represents the marginal cost curve and average total cost curve.

Figure –1

In Figure – 1, the horizontal axis measures quantity and the vertical axis measures price. The above figure shows the impact of change in the marginal cost curve and average total cost curve of the firm and supply in the market due to an increase in the price.

In Figure – 1, the initial marginal cost curve and average cost curve of the firm are MC1 and ATC1 respectively. The market equilibrium shows where supply curve ‘S’ intersects with demand curve ‘D’. At this equilibrium point, the price level is P and quantity is Q, which shows that price is equal to the minimum of the average total cost

Subpart (b):

To determine
The impact of increasing price.

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