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Question
Explain how input prices are a determinant of supply of a good by a firm.
Solution
When there is a rise in input prices, there will be an increase in the cost of production which results in a decline in profit margin and the supply of the good.
When there is an increase in input prices, the supply curve S shifts leftwards from S to S1. It leads to a fall in the supply of good from OQ2 to OQ1, where the price remains constant at
OP.
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