[chns91]

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?

[JudyKayTee]

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

[chns91]

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

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.

[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.

[chns91]

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.

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 :)