Many small boats are made of fiberglass, which is derived from crude oil. Suppose that the price of...

Question

Many small boats are made of fiberglass, which is derived from crude oil. Suppose that the price of oil rises.

a. Using diagrams, show what happens to the cost curves of an individual boat-making firm and to the market supply curve.

b. What happens to the profits of boat makers in the short run? What happens to the number of boat makers in the long run?

Robert · Accepted Answer

The answers are as follows: 
a. The rise in the price of crude oil increases production costs for individual firms and thus shifts the 
industry supply curve up, as shown in Figure 1. The typical firm’s initial marginal-cost curve is MC1 
and its average-total-cost curve is ATC1. In the initial equilibrium, the industry supply curve, S1, 
intersects the demand curve at price P1,

Many small boats are made of fiberglass, which is derived from crude oil. Suppose that the price of oil rises. a. Using diagrams, show what happens to the cost curves of an individual boat-making firm...

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