Lets suppose that a firm can produce either A or B. Will an increase in the profitability of A lead to an increase in the supply of A? Or would it lead to a decrease/increase in the supply of B?

Let's suppose you post your answer and reasoning and "we" see if it's right?

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Originally Posted by JudyKayTee

Let's suppose you post your answer and reasoning and "we" see if it's right?

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Okay then. I would answer that it leads to an increase in the supply of A and this is because greater profitability will encourage investment, therefore it will shift the supply curve outwards.

Both your answer and your rationale are correct, as profitability is one of the fundamental drivers of supply.

The second part of the question, though, deserves a little thought. For a firm already operating at/near full capacity, the tradeoff to ramping up production of A is a reduction of B output, at least in the short run.

If you have to pick exactly one of the two options on either side of the word "or", then stick with your "increase of A supply" answer. Just be aware that both of the conditions might hold true simultaneously; it's unfortunate the question's author neglected to clarify the full-capacity and the short- / long-run issues.

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Originally Posted by ArcSine

Both your answer and your rationale are correct, as profitability is one of the fundamental drivers of supply.

The second part of the question, though, deserves a little thought. For a firm already operating at/near full capacity, the tradeoff to ramping up production of A is a reduction of B output, at least in the short run.

If you have to pick exactly one of the two options on either side of the word "or", then stick with your "increase of A supply" answer. Just be aware that both of the conditions might hold true simultaneously; it's unfortunate the question's author neglected to clarify the full-capacity and the short- / long-run issues.

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Thank you for the reply, it was very clear! This is what I originally thought too, but this question comes from a multiple choice exam question and I just wasn't sure of the answer. That is why I asked here, since I was between these 2 possible answers.

Thank you again :)