I\'m confused on these questions. Please help. 5a) If input prices had increased

Question

I'm confused on these questions. Please help.

5a) If input prices had increased as firms entered the lithium industry in response to rising demand, what would have been the shape of the long-run supply curve?

5b) If the market demand for lithium were to decrease during the 2020s, what would happen to the market clearing price of lithium in the long run?

Changing Methods of Extracting Lithium Alter Input Prices For many years, a number of U.S. companies were key pro viders of lithium. These firms mined the element from seams of a mineral called spodumene that is found in large quantities in North Carolina and a few other states. During the past two decades, however, many South American companies have developed less expensive ways of extracting lithium using alternative inputs. These firms pump brine from ancient lakebeds into giant evaporation

Explanation / Answer

5(a)

It has been provided that input prices have increased as the number of firms entering the lithium industry increased in response to rising demand.

This implies that cost of production of firms within lithium industry is increasing as industry is expanding.

When cost of production increases as industry expands, it is said to be increasing-cost industry.

The long-run supply curve slopes upward, when industry is subject to increasing cost.

Thus, if input prices had increased as firms entered the lithium industry in response to rising demand, the long-run supply curve would have been upward sloping.

5(b)

In case of increasing cost industry, in long-run, market clearing prices rises as the market demand increases and market clearing prices falls as market demand decreases.

As stated in part (a), lithium industry is increasing cost industry.

So, being a increasing cost industry, if the market demand for lithium were to decrease during the 2020s, the market clearing price of lithium will fall in the long-run.

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