An increase in the price of a variable input employed in a perfectly competitive industry will:
A)shift the short run industry supply curve up and to the left.
B)have no effect on supply under fixed proportions production.
C)reduce the amount produced by each firm in long- run equilibrium.
D)have no effect on long- run equilibrium price under constant- costs.

Question

Quizplus · Accepted Answer

In a perfectly competitive industry, each firm is a price taker and faces a horizontal supply curve at the market price. An increase in the price of a variable input (e.g. labor, raw materials) will increase marginal cost and cause each firm's supply curve to shift up and to the left, reducing the quantity supplied at each price. Therefore, the short run industry supply curve will also shift up and to the left. However, in the long run, firms can adjust their inputs and production methods, and the industry supply curve may shift back to its original position, but at a higher equilibrium price.

An Increase in the Price of a Variable Input Employed