An increase in the productivity of a variable input (labor
is considered a variable input) is identical to a reduction in
the cost of a variable input, since a more productive input is
a cheaper input in terms of production. As shown above this means
that the MC curve shifts out to MC2 and so MR = MC occurs at a greater level of output and lower price
10. Suppose the diamond industry is a monopoly and suppose that
there is an increase in the productivity of diamond miners. Which
of the following would you predict will happen in the market for
diamonds in the short run.
- An increase in the price of diamonds and no change in the number
of diamonds sold. This would require a simultaneous increase in demand and an increase
in variable cost (or a reduction in productivity).
- An increase in the price of diamonds and a decrease in the number
of diamonds sold. This would require an increase in variable cost or a decrease
in productivity.
- No change in the price of diamonds and no change in the number
of diamonds sold. This would occur if only fixed cost changed, or nothing at all
changed.
- A decrease in the price of diamonds and no change in the number
of diamonds sold. This would require a simultaneous decrease in demand and a decrease
in variable cost (or an increase in productivity).
- An decrease in the price of diamonds and an increase in the number
of diamonds sold.
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