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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

The market supply of tea from Assam estates is Qs = 200 + 20P, where Q is in tonnes and P is in ₹ per kg. Following a cut in input costs, supply becomes Qs = 260 + 20P. At a price of ₹10 per kg, what is the change in quantity supplied and how is it described?

Quantity supplied at ₹10 rises from 400 to 460 tonnes, an increase of 60 tonnes. Because the price is constant and the change comes from lower input costs, this is a rightward shift of the whole supply curve, not a movement along it.

  1. AAn increase of 60 tonnes, a rightward shift of the supply curveCorrect
  2. BAn increase of 60 tonnes, a movement along the supply curve
  3. CAn increase of 200 tonnes, a rightward shift of the supply curve
  4. DA decrease of 60 tonnes, a leftward shift of the supply curve
  5. No change, because the price is unchanged

Explanation

At P=10, the old supply is 200+200=400 and the new supply is 260+200=460, an increase of 60 tonnes. Because price is unchanged and the quantity supplied at each price rises, this is a shift of the curve, not a movement along it. A leftward shift would mean a fall.

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