A factory produces blue and green widgets, both at equal production costs. In one day, the factory can make 20 widgets of either color. The factory has been making 10 blue and 10 green widgets per day because they both sell for $5.00. Recently, the price of blue widgets has increased from $5.00 each to $8.00 each. How does the law of supply say the factory will respond to the increase in the price of blue widgets?

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Yoselin Jennings

10 January, 16:37

A factory produces blue and green widgets, both at equal production costs. In one day, the factory can make 20 widgets of either color. The factory has been making 10 blue and 10 green widgets per day because they both sell for $5.00. Recently, the price of blue widgets has increased from $5.00 each to $8.00 each. How does the law of supply say the factory will respond to the increase in the price of blue widgets?

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Samson · Answer 1

The law of supply states that, all else equal, an increase price will result to an increase in quantity supplied.

Originally:

10 blue and 10 green at $5 each.

Sales = 5 (10+10)

S = 5 (20)

S = 100

Price of blue widget increase to $8.00

Sales = 8 (10) + 5 (10)

S = 80 + 50

S = 130

To maximize the earning potential of the blue widget, the company may opt to produce only blue widgets

Sales = 8 (20)

S = 160

The company will have the highest sale if they only produce blue widgets.