Below is a hypothetical example of an estimated industry supply curve for automobiles. Qs = 4000P – 50,000PL - 3,700PT – 400,000PK - 1000T Where: P : Average Price of an Automobile PL: Average Price of Labor per Hour (the wage rate) PT: Average Price of Trucks PK: Price of Capital – Interest Rate – i T: Tariff on Imported Cars Assume: PL = $30 per hour PT = $15,000 PK = 10% T = $1,000 PL = $30 per hour Slope parameter associated with the average price of labor is -50,000 PT = $15,000 Slope parameter associated with the average price of trucks is -3,700 PK = 10% Slope parameter associated with the price of capital (the interest rate) is -1,000 (in your equation express the price of capital as 10) T = $1,000 Slope parameter associated with the tariff is – 1,000 a. Derive the supply curve for automobiles as a function of price holding all other things constant. b. Graph the supply curve in linear form as a function of price only indicating the quantity supplied at a price of -0- or the vertical intercept. Indicate Qs at prices of 16,000, $18,000, and $20,000. c. What information does the slope parameter for price tell us? d. Assume the average labor cost (the wage rate) falls by $4. Derive the new supply function. Graphically, what will happen to the supply curve? e. Assume the cost of capital increases from 10% to 15%. Derive the new supply function. Graphically, what will happen to the supply curve?
Below is a hypothetical example of an estimated industry supply curve for automobiles.
Qs = 4000P – 50,000PL - 3,700PT – 400,000PK - 1000T
Where:
P : Average
PL: Average Price of Labor per Hour (the wage rate)
PT: Average Price of Trucks
PK: Price of Capital – Interest Rate – i
T: Tariff on Imported Cars
Assume:
PL = $30 per hour
PT = $15,000
PK = 10%
T = $1,000
PL = $30 per hour Slope parameter associated with the average price of
labor is -50,000
PT = $15,000 Slope parameter associated with the average price of
trucks is -3,700
PK = 10% Slope parameter associated with the price of capital (the
interest rate) is -1,000 (in your equation express the
price of capital as 10)
T = $1,000 Slope parameter associated with the tariff is – 1,000
a. Derive the supply curve for automobiles as a function of price holding all other things constant.
b. Graph the supply curve in linear form as a function of price only indicating the quantity supplied at a price of -0- or the vertical intercept. Indicate Qs at prices of 16,000, $18,000, and $20,000.
c. What information does the slope parameter for price tell us?
d. Assume the average labor cost (the wage rate) falls by $4. Derive the new supply function. Graphically, what will happen to the supply curve?
e. Assume the cost of capital increases from 10% to 15%. Derive the new supply function. Graphically, what will happen to the supply curve?
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