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You are a producer of lithium batteries. Last month, a flood at your factory eliminated 50% of your firm’s production capability. At the same time, your compensation costs increased by 5% because of an annual pay raise. What is the consequence of these events?

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Answer:

  • The flood shifts the supply to the left.
  • The flood does not shift the demand curve.
  • The increase in annual pay doesn't shift the demand curve.
  • The increase in annual pay shifts the supply curve to the left.

Reason – Due to changes, only supply of lithium batteries would be affected. A flood would decrease the output capabilities and hence, reduce the supply in the market for lithium batteries.

Moreover, an increase in compensation cost would reduce the profitability of the producer and hence, they would decrease the supply of lithium batteries.

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