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    Production decisions given changes in demand and supply.

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    You are manager of a small U.S firm that sells hammers in a competitive U.S. market (the hammers you sell are a standardized commodity; stores view your hammers as identical to those available from hundreds of other firms).You are concerned about two events you recently learned through trade publication:

    1) The overall market supply of hammers decreased by 2 percent, due to the exit by foreign competitors,
    2) Due to a growing U.S. economy, the overall market demand for hammers will increase by 2 percent.

    Based on this information, should you plan to increase or decrease your production of nails? Explain. (Directions: use the graphical presentation of the changes in the market for hammers and the impact of these changes on your firm's output)

    Please somehow attach a graphical representation with the solution - perhaps in Excel? Thank you in advance for your help.

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    Solution Preview

    Please see attached file for fully formatted explanation with graphs.
    Given that your firm is one of many producing identical goods your market is likely characterized as perfectly ...

    Solution Summary

    The following solution outlines how a firm makes production decisions to maximize profit by setting MR=MC. Given expected changes in demand and supply, I demonstrate how the firms output will be affected.