Question

ou are a producer of cold medicine. Last month, a flood at your factory eliminated 50% of your firm’s production capability. At the same time, your compensation costs increased by 5% because of an increase in healthcare costs. What is the consequence of these events?

Answer 1

Answer:

The flood shifts the supply to the left.

The increase in healthcare costs shifts the supply curve to the left.

Explanation:

An increase in the cost of production inputs (increase in health costs) or a decrease in the availability of resources (the flood reduced the firm's production capability), will shift the supply curve to the left.

A leftward shift of the supply curve will lower the quantity supplied and will increase the price of the good at every level of demand.