Question

Paolo is skilled at making both earrings and bracelets. Paolo has no preference between making earrings or bracelets since he earns the same amount from the two activities. If the selling price of bracelets decreases from $40 to $20, then Paolo's opportunity cost of making earrings and making earrings is now profitable than making bracelets. Suppose that the earrings market consists of several suppliers like Paolo who are skilled at making both earrings and bracelets. Which of the following is likely to happen to the supply curve of earrings when the price of a bracelets decreases? a. It shifts to the right b. It shifts to the left c. It does not change

Answer 1

Answer:

a. It shifts to the right

Explanation:

If the selling price of bracelets decreases and all suppliers of earring and bracelets are like Paolo, which means that they are indifferent between making one or another (because they earn the same amount form both), then they will like to do more earrings because they will earn more ($40 instead of $20). If all suppliers decide to do more earrings, the total supply will increase, which looks (in the demand and supply graph) as a shift to the right of the supply curve (for each price there is more quantity supplied).