consider the following general linear supply function: Qs= -18 + 2 P -3 P i, whe
ID: 2429300 • Letter: C
Question
consider the following general linear supply function: Qs= -18 + 2 P -3 P i, where P is the price of the good and PI is the price of key input in production. (a) interpret the numerical value of the slope coefficient on the price input(PI) and (b) the negative slope coefficient on pi, implies and inverse relationship between the price of of the input and quantity supplied Qs, ceteris paribus. Is this inverse relationship consistent with supply theory? Expain why an inverse relationship is or is not predicted by supply theory
Explanation / Answer
Answer (a).
Interpretation:- keeping everything else constant as the price of iinput increases by 1 unit then supply decreases by 3 units on average.
(b) yes the negative slope coefficient of input price implies that there is a negative relationship between quantity supply and the input price,we know that the price of input is the cost of production so as cost of production increases then the supplier will supply less quantity and supply will decrease.
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