Question

home / study / business / economics / economics questions and answers / Consider The General Supply Function: Qs=1,000+20P-9P1+25F Qs=Quantity Supplied P=price Of ...

Question: Consider the general supply function: Qs=1,000+20P-9P1+25F Qs=Quantity supplied P=price of commod...

Consider the general supply function: Q_s=1,000+20P-9P₁+25F

Q_s=Quantity supplied

P=price of commodity

P₁=price of a key input in the production process

F=number of firms producing the commodity

What is the value of the coefficient of the price of a key input to the production process? Does it have the theoretically correct algebraic sign? Why?

Answer 1

Coefficient:

This is a number associated with a variable in multiplying form.

Here the variable is P1; the number (-9) is associated with it in multiplication; therefore, the coefficient is -9.

Answer: -9

Correctness:

Answer: absolutely correct

There is an inverse relationship between quantity supply and input price – if input price increases the quantity supply decreases, and vice versa. In order to establish such inverse relationship the coefficient of input price has negative (-) sign.