14.2 Suppose there are 1,000 identical firms producing diamonds and the total cost curve for each firm

Question:

14.2 Suppose there are 1,000 identical firms producing diamonds and the total cost curve for each firm is given by C q 2 wq, where q is the firm’s output level and w is the wage rate of diamond cutters.

a. If w 10, what will be the firm’s (short-run) supply curve? What is the industry’s supply curve? How many diamonds will be produced at a price of 20 each? How many more diamonds would be produced at a price of 21?

b. Suppose the wages of diamond cutters depend on the total quantity of diamonds produced and the form of this relationship is given by w 0.002Q, where Q represents total industry output, which is 1,000 times the output of the typical firm.

In this situation, show that the firm’s marginal cost (and short-run supply) curve depends on Q. What is the industry supply curve? How much will be produced at a price of 20? How much more will be produced at a price of 21? What do you conclude about the shape of the short-run supply curve?

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