Question

Extended care facilities are paid on a per diem basis, and they have an upward sloping supply curve. What will be the effect on supply or quantity supplied in each of the following cases:

a) a reduction in the real per diem rate paid to the extended care facility?

b) an increase in wages paid to the staff who work in the extended care facility?

c) a new cleaner that allows the extended care facility to hire fewer custodial staff?

d) a greater supply of home care services (a substitute for extended care facilities)?

Answer 1

As the supply of extended care facilities is upward sloping which is normal supply curve so the quantity supplied will change according to law of supply.

a. If the real per diem rate decreases that means price of the extended care facility decreases. According to law of supply, if the price of a product decreases its supply reduces. Thus quantity supplied of the extended care facility will decrease.

b. If the wages of staff increases then cost of production also increases. And if cost of production increases then that means profit of the firm decreases, so supply also decreases.

c. Now in this case if some new technology needs less staff that means cost of production decreases, due to which profit of the firm increases and as a result of which supply also increases.

d. Now home care services supply is increased which is substitute of extended care facilities. So that means there is more profit in producing home care facilities rather then producing extended care facilities. So supply of extended care facilities will decrease.

These four cases can be explained through diagrams. Which is explained in picturesp Refer them.