Question:
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A factory produces blue and green widgets, both at equal production costs. In one day, the factory can make 20 widgets of either color. The factory has been making 10 blue and 10 green widgets per day because they both sell for $5.00. Recently, the price of blue widgets has increased from $5.00 each to $8.00 each.
How does the law of supply say the factory will respond to the increase in the price of blue widgets?
Answer
by increasing the number of blue widgets supplied
Step-by-step explanation:
If we recall the law of supply in economics, it states that: Considering that all factors are retained at equilibrium, an increase in the price of a product or service will result in an increase in the quantity supplied of the good and services. So therefore, if we relate this back to the question asked,
We have:
10 blue and 10 green at $5 each.
Therefore,
Sales = 5 (10+10)
Sales = 5 (20)
Sales = 100
Now, considering the fact that the price of blue widget increase to $8.00
Sales will now therefore be = 8 (10) + 5 (10)
Sales = 80 + 50 = 130
So we can hence conclude that to maximize the earning potential of the blue widget, the company should produce more of blue widgets and increasing the number of blue widgets supplied which will give us:
Sales = 8 (20) = 160