CHAPTER 24: Industry Supply
TRUE/FALSE
1. The short-run industry supply curve can be found by horizontally summing the short-run supply curves
of all the individual firms in the industry.
2. It is possible to have an industry in which all firms make zero economic profits in long-run
equilibrium.
3. The possibility of more firms entering an industry in the long run tends to make long-run industry
supply more price elastic than short-run industry supply.
4. In a competitive market, if both demand and supply curves are linear, then a per-unit tax of $10 will
generate exactly the same deadweight loss as a per-unit subsidy of $10.
5. If there are constant returns to scale in a competitive industry, then the long-run industry supply curve
for that industry is horizontal.
6. If some firm in an industry has the production function F(x, y) = x3/4 y3/4, where x and y are the only
two inputs in producing the good, then that industry cannot be competitive in the long run.
7. The market for a good is in equilibrium when the government unexpectedly imposes a quantity tax of
$2 per unit. In the short run, the price will rise by $2 per unit so that firms can regain their lost revenue
and continue to produce.
MULTIPLE CHOICE
1. In East Icicle, Minnesota, on the northern edge of the corn belt, the growing season is short and the
soil is poor. Corn yields are meager unless a great deal of expensive fertilizer is used. In Corncrib,
Illinois, the land is fertile and flat and the growing season is 20 days longer. For any given expenditure
per acre, corn yields are far greater than in East Icicle. Farmers in both places are profit maximizers
who grow corn.
a.
Marginal costs are higher in East Icicle than in Corncrib.
b.
More fertilizer is used per acre in East Icicle than in Corncrib.
c.
Marginal costs are the same in both places.
d.
More fertilizer is used per acre in Corncrib than in East Icicle.
e.
More than one of the above is true.
2. A competitive industry has 10,000 identical firms. For each firm in the industry, the long-run cost of
producing y units of output is c(y) = $100 + y2 if y 0 and c(0) = 0. The government imposes a lump
sum tax of $300 on each firm in the industry. Firms can avoid this tax only by going out of business.
There is free entry and exit into this industry. In the long run, the number of firms
a.
stays constant and the price of output rises by $30.
b.
doubles and the price of output doubles.
c.
is halved and the price of output is doubled.
d.
stays constant and the price of output rises by less than $30.
e.
None of the above.
3. The bicycle industry is made up of 100 firms with the long-run cost curve c(y) = 2 + (y2/2) and 60
firms with the long-run cost curve c(y) = y2/10. No new firms can enter the industry. What is the
long-run industry supply curve at prices greater than $2?
a.
y = 420p.
b.
y = 400p.
c.
y = 200p.
d.
y = 300p.
e.
y = 435p.
4. The bicycle industry y is made up of 100 firms with the long-run cost curve c(y) = 2 + (y2/2) and 60
firms with the long-run cost curve c(y) = y2/10. No new firms can enter the industry. What is the
long-run industry supply curve at prices greater than $2?
a.
y = 400p.
b.
y = 420p.
c.
y = 200p.
d.
y = 300p.
e.
y = 435p.
5. The bicycle industry is made up of 100 firms with the long-run cost curve c(y) = 2 + (y2/2) and 120
firms with the long-run cost curve c(y) = y2/4. No new firms can enter the industry. What is the
long-run industry supply curve at prices greater than $2?
a.
y = 170p.
b.
y = 360p.
c.
y = 240p.
d.
y = 340p.
e.
y = 375p.
6. Two firms constitute the entire doghouse industry. One has a long-run cost curve of 3 + 4y2/3 and the
other has a long-run cost curve of 10 + y2/10. If no new firms enter the industry, at which of the
following prices will exactly one firm operate?
a.
$1
b.
$3
c.
$5
d.
$7
e.
None of the above.
7. On a small island, papayas can only be sold in the market in the center of the island. Although papayas
only cost $1 to raise, they can be sold in the market for $3. But it costs $.10 per kilometer to transport
each papaya to market. If an acre of land grows 200 papayas, how much rent does an acre of land 4
kilometers from the market command?
a.
$302
b.
$320
c.
$240
d.
$262
e.
None of the above.
8. On a tropical island there are 100 potential boat builders, numbered 1 through 100. Each can build up
to20 boats a year, but anyone who goes into the boatbuilding business has to pay a fixed cost of
$19.Marginal costs differ from person to person. Where y denotes the number of boats built per year,
boat builder 1 has a total cost function c(y) = 19 + y. Boat builder 2 has a total cost function c(y) = 19 +
2y, and more generally, for each i, from 1 to 100, boat builder i has a cost function
c(y) = 19 + iy. If the price of boats is 25,how many boats will be built per year?
a.
480
b.
120
c.
60
d.
720
e.
Any number between 500 and 520 is possible.
9. On a tropical island there are 100 potential boat builders, numbered 1 through 100. Each can build up
to8 boats a year, but anyone who goes into the boatbuilding business has to pay a fixed cost of $7.
Marginal costs differ from person to person. Where y denotes the number of boats built per year, boat
builder 1 has a total cost function c(y) = 7 + y. Boat builder 2 has a total cost function c(y) = 7 + 2y,
and more generally, for each i, from 1 to 100, boat builder i has a cost function c(y) = 7 + iy. If the
price of boats is 15, how many boats will be built per year?
a.
112
b.
64
c.
32
d.
168
e.
Any number between 120 and 128 is possible.
10. On a tropical island there are 100 potential boat builders, numbered 1 through 100. Each can build up
to 16 boats a year, but anyone who goes into the boatbuilding business has to pay a fixed cost of $15.
Marginal costs differ from person to person. Where y denotes the number of boats built per year, boat
builder 1 has a total cost function c(y) = 15 + y. Boat builder 2 has a total cost function c(y) = 15 + 2y,
and more generally, for each i, from 1 to 100, boat builder i has a cost function c(y) = 15 + iy. If the
price of boats is 40, how many boats will be built per year?
a.
624
b.
200
c.
936
d.
400
e.
Any number between 640 and 656 is possible.
11. Consider a competitive industry with several firms all of which have the same cost function,
c(y) = y2 + 4 for y 0 and c(0) = 0. The demand curve for this industry is D(p) = 50 2 p, where p is the
price. The long-run equilibrium number of firms in this industry is
a.
4.
b.
23.
c.
25.
d.
46.
e.
2.
12. Brand X is one of many firms in a competitive industry where each firm has a constant marginal cost
of 2 dollars per unit of output. If marginal cost for Brand X rises to 4 dollars per unit and marginal
costs of all other firms in the industry stay constant, by how much does the price in the industry
increase?
a.
2 dollars
b.
1 dollar
c.
0 dollar
d.
2/n, where n is the number of firms in the industry
e.
None of the above.
13. A firm uses a single input to produce its output, which is sold in a competitive market. It gets quantity
discounts on purchases of its input. If it buys x units of the input, the price it must pay per unit of input
is 289/x + 3. If it buys no inputs, it doesn’t have to pay anything. The firm’s production function is f(x)
= 45x − x2. If the price of the firm’s output is 1, the profit-maximizing amount of input to buy is
a.
21.
b.
0.
c.
42.
d.
31.50.
e.
None of the above.
14. A firm uses a single input to produce its output, which is sold in a competitive market. It gets quantity
discounts on purchases of its input. If it buys x units of the input, the price it must pay per unit of input
is 25/x + 4. If it buys no inputs, it doesn’t have to pay anything. The firm’s production function is f(x)
= 60x − x2. If the price of the firm’s output is 1, the profit-maximizing amount of input to buy is
a.
56.
b.
0.
c.
42.
d.
28.
e.
None of the above.
15. A firm uses a single input to produce its output, which is sold in a competitive market. It gets quantity
discounts on purchases of its input. If it buys x units of the input, the price it must pay per unit of input
is 400/x + 4. If it buys no inputs, it doesn’t have to pay anything. The firm’s production function is f(x)
= 40x − x2. If the price of the firm’s output is 1, the profit-maximizing amount of input to buy is
a.
0.
b.
36.
c.
18.
d.
27.
e.
None of the above.
16. Chirimollas grow only on the island of Socorro, off the coast of Mexico. They need very little soil, so
virtually an unlimited supply can be grown at a cost of $4 per unit. When they are exported to the
United States, half of the chirimollas that are shipped rot on the boat and are dumped in the ocean.
Shipping costs are $1 for every unit that is put on board a ship. The demand function for chirimollas in
the United States is given by the equation q = 10,000 − 20p2. If chirimollas are competitively supplied,
the number of units that are sold in the United States will be
a.
8,000.
b.
9,500.
c.
9,680.
d.
9,190.
e.
9,000.
17. An industry has 1,000 firms, each with the production function f(x1, x2) = x1/21x1/22. The price of factor
1 is $1 and the price of factor 2 is $1. In the long run, both factors are variable, but in the short run,
each firm is stuck with using 100 units of factor 2. The long-run industry supply curve is
a.
upward sloping with zero supply if price is less than $10.
b.
downward sloping for outputs less than 10.
c.
horizontal with zero supply for prices less than $2 and infinite supply for prices greater
than $2.
d.
horizontal with zero supply for prices less than $10 and infinite supply for prices greater
than $10.
e.
upward sloping with zero supply if price is less than $20.
18. Suppose that all firms in a given industry have the same supply curve given by Si(p) = 2p when p is
greater than or equal to $2 and Si(p) = 0 when p is less than $2. Suppose that market demand is given
by D(p) = 12 − p. If firms continue to enter the industry so long as they can do so profitably, the
equilibrium price must be closest to
a.
$5.
b.
$4.
c.
$2.40.
d.
$2.
e.
$1.75.
19. In the absence of government interference, there is a constant marginal cost of $6 per ounce for
growing marijuana and delivering it to buyers. Suppose that government authorities seize shipments
whenever they find them and resell the marijuana that they seize on the open market. The probability
that any shipment of marijuana is seized is .10. If a shipment is seized, there is no other punishment
besides loss of the marijuana that is seized. The effect of the government action is to
a.
leave prices unchanged.
b.
raise the equilibrium price by $.67.
c.
lower the equilibrium price by $.33.
d.
raise the equilibrium price by $1.33.
e.
raise the equilibrium price by $.60.
20. In the absence of government interference, there is a constant marginal cost of $6 per ounce for
growing marijuana and delivering it to buyers. Suppose that government authorities seize shipments
whenever they find them and resell the marijuana that they seize on the open market. The probability
that any shipment of marijuana is seized is .50. If a shipment is seized, there is no other punishment
besides loss of the marijuana that is seized. The effect of the government action is to
a.
leave prices unchanged.
b.
raise the equilibrium price by $6.
c.
lower the equilibrium price by $3.
d.
raise the equilibrium price by $12.
e.
raise the equilibrium price by $3.
21. In the absence of government interference, there is a constant marginal cost of $4 per ounce for
growing marijuana and delivering it to buyers. Suppose that government authorities seize shipments
whenever they find them and resell the marijuana that they seize on the open market. The probability
that any shipment of marijuana is seized is .50. If a shipment is seized, there is no other punishment
besides loss of the marijuana that is seized. The effect of the government action is to
a.
raise the equilibrium price by $8.
b.
raise the equilibrium price by $4.
c.
lower the equilibrium price by $2.
d.
leave prices unchanged.
e.
raise the equilibrium price by $2.
22. In the problem discussed in your workbook, the cost of capturing a cockatoo and transporting him to
the United States is about $40 per bird. Cockatoos are drugged and smuggled in suitcases to the United
States. Half of the smuggled cockatoos die in transit. Each smuggled cockatoo has a 10% probability
of being discovered, in which case the smuggler is fined. If the fine imposed for each smuggled
cockatoo is increased to $1,100, then the equilibrium price of cockatoos in the United States will be
a.
$333.33.
b.
$150.
c.
$95.
d.
$73.
e.
$244.44.
23. In the problem discussed in your workbook, the cost of capturing a cockatoo and transporting him to
the United States is about $40 per bird. Cockatoos are drugged and smuggled in suitcases to the United
States. Half of the smuggled cockatoos die in transit. Each smuggled cockatoo has a 10% probability
of being discovered, in which case the smuggler is fined. If the fine imposed for each smuggled
cockatoo is increased to $1,200, then the equilibrium price of cockatoos in the United States will be
a.
$100.
b.
$160.
c.
$76.
d.
$355.56.
e.
$266.67.
24. In the problem discussed in your workbook, the cost of capturing a cockatoo and transporting him to
the United States is about $40 per bird. Cockatoos are drugged and smuggled in suitcases to the United
States. Half of the smuggled cockatoos die in transit. Each smuggled cockatoo has a 10% probability
of being discovered, in which case the smuggler is fined. If the fine imposed for each smuggled
cockatoo is increased to $700, then the equilibrium price of cockatoos in the United States will be
a.
$110.
b.
$244.44.
c.
$75.
d.
$61.
e.
$155.56.
25. In the absence of government interference, there is a constant marginal cost of $5 per ounce for
growing marijuana and delivering it to buyers. If the probability that any shipment of marijuana is
seized is .10 and the fine if a shipper is caught is $25 per ounce, then the equilibrium price of
marijuana per ounce is
a.
$8.33.
b.
$7.50.
c.
$30.
d.
$4.50.
e.
$5.50.
26. In the absence of government interference, there is a constant marginal cost of $5 per ounce for
growing marijuana and delivering it to buyers. If the probability that any shipment of marijuana is
seized is .10 and the fine if a shipper is caught is $45 per ounce, then the equilibrium price of
marijuana per ounce is
a.
$50.
b.
$9.50.
c.
$10.56.
d.
$4.50.
e.
$5.50.
27. In the absence of government interference, there is a constant marginal cost of $5 per ounce for
growing marijuana and delivering it to buyers. If the probability that any shipment of marijuana is
seized is .30 and the fine if a shipper is caught is $35 per ounce, then the equilibrium price of
marijuana per ounce is
a.
$22.14.
b.
$40.
c.
$3.50.
d.
$15.50.
e.
$6.50.
28. In a certain industry, the supply curve of any firm is Si(p) = p/2. If a firm produces 5 units of output,
what are its total variable costs?
a.
$50
b.
$23
c.
$37.50
d.
$25
e.
There is not enough information given to determine total variable costs.
29. In a certain industry, the supply curve of any firm is Si(p) = p/2. If a firm produces 6 units of output,
what are its total variable costs?
a.
$34
b.
$72
c.
$54
d.
$36
e.
There is not enough information given to determine total variable costs.
30. In a certain industry, the supply curve of any firm is Si(p) = p/2. If a firm produces 5 units of output,
what are its total variable costs?
a.
$37.50
b.
$25
c.
$23
d.
$50
e.
There is not enough information given to determine total variable costs.
31. An industry has 100 firms. These firms have identical production functions. In the short run, each firm
has fixed costs of $200. There are two variable factors in the short run and output is given by y =
(minx1, 4x2)1/2. The cost of factor 1 is $2 per unit and the cost of factor 2 is $4 per unit. In the short
run, the industry supply curve is given by
a.
Q = 100p/6.
b.
Q = 100p/6.
c.
Q = 300p1/2.
d.
the part of the line Q = 50(min2, 16) for which pQ 200/Q.
e.
None of the above.
32. An industry has 100 firms. These firms have identical production functions. In the short run, each firm
has fixed costs of $200. There are two variable factors in the short run and output is given by y =
(minx1, 3x2)1/2. The cost of factor 1 is $5 per unit and the cost of factor 2 is $4 per unit. In the short
run, the industry supply curve is given by
a.
Q = 100p/10.
b.
the part of the line Q = 50(min5, 12) for which pQ 200/Q.
c.
Q = 575p1/2.
d.
Q = 100p/12.67.
e.
None of the above.
33. An industry has 100 firms. These firms have identical production functions. In the short run, each firm
has fixed costs of $200. There are two variable factors in the short run and output is given by y =
(minx1, 4x2)1/2. The cost of factor 1 is $5 per unit and the cost of factor 2 is $5 per unit. In the short
run, the industry supply curve is given by
a.
Q = 100p/12.5.
b.
Q = 100p/10.
c.
Q = 580p1/2.
d.
the part of the line Q = 50(min5, 20) for which pQ 200/Q.
e.
None of the above.
34. The cheese business in Lake Fon-du-lac, Wisconsin, is a competitive industry. All cheese
manufacturers have the cost function C = Q2 + 4, while demand for cheese in the town is given by Qd =
120 − P. The long-run equilibrium number of firms in this industry is
a.
29.
b.
58.
c.
56.
d.
120.
e.
59.
35. The cheese business in Lake Fon-du-lac, Wisconsin, is a competitive industry. All cheese
manufacturers have the cost function C = Q2 + 16, while demand for cheese in the town is given by Qd
= 120 − P. The long-run equilibrium number of firms in this industry is
a.
14.
b.
28.
c.
22.
d.
120.
e.
29.
36. The cheese business in Lake Fon-du-lac, Wisconsin, is a competitive industry. All cheese
manufacturers have the cost function C = Q2 + 9, while demand for cheese in the town is given by Qd =
120 − P. The long-run equilibrium number of firms in this industry is
a.
120.
b.
38.
c.
19.
d.
34.
e.
39.
37. In Baggs, Wyoming, cattle can be produced according to the following process: C = G/20 + P/30,
where C is the number of cattle, G are bushels of grain, and P are acres of pasture. If grain costs $5 per
bushel and pasture costs $4 per acre, how many cattle can Rancher Roy produce with a budget of
$3,000?
a.
600
b.
60
c.
30
d.
25
e.
150
38. In Baggs, Wyoming, cattle can be produced according to the following process: C = = G/10 + P/40,
where C is the number of cattle, G are bushels of grain, and P are acres of pasture. If grain costs $4 per
bushel and pasture costs $4 per acre, how many cattle can Rancher Roy produce with a budget of
$4,000?
a.
80
b.
25
c.
100
d.
1,000
e.
400
39. In Baggs, Wyoming, cattle can be produced according to the following process: C = G/20 + P/40,
where C is the number of cattle, G are bushels of grain, and P are acres of pasture. If grain costs $4 per
bushel and pasture costs $3 per acre, how many cattle can Rancher Roy produce with a budget of
$6,000?
a.
50
b.
100
c.
1,500
d.
75
e.
300
PROBLEM
1. The cost per bushel of growing corn on a given acre of land depends partly on how intensely the land
is farmed and partly on the quality of the soil, the amount of rainfall, and the length of the growing
season. Suppose that the last three factors are summarized by a single index f for fertility. Suppose that
the long-run total cost of producing y hundred bushels of corn on an acre of land of fertility f is c(y, f ),
where c(y, f ) = (1 + y2 )/f for y 0 and c(0, f ) = 0.
a. Write down a formula for the long-run average cost function per hundred bushels of corn from an
acre of land of quality f.
b. At what level of output is long-run average cost minimized on an acre of land of quality f?
c. What is the lowest price per hundred bushels at which an acre of land of quality f will be used to
produce corn?
2. The price elasticity of gasoline in the United States has been estimated to be 0.15. If this is so, should
profit-maximizing gasoline stations raise their prices? (Explain why or why not.)
3. The price elasticity of demand for gasoline in the United States is equal to 0.15. How should the price
elasticity of demand for the individual firm compare to 0.15 (higher, lower, same, can’t tell)? Explain
why.