You are the manager of a small U. S. firm that sells nails in a competitive U. S. market (the nails you sell are a standardized commodity; stores view your nails as identical to those available from hundreds of other firms). You are concerned about two events you recently learned about through trade publications: (1) the overall market supply of nails will decrease by 2 percent, due to exit by foreign competitors; and (2) due to a growing U. S. economy, the over-all market demand for nails will increase by 2 percent. Your manufacturing process is such that you can benefit from economies of scale for limited quantities, but for a large production average costs increase with the amount of units produced. Based on this information:
a. Should you plan to increase or decrease your production of nails? Explain carefully
b. How would the answer to the previous question change if the supply increases by 2 percent and the demand decreases by 2 percent? Are price and quantity the only decisions you have to make? Explain why this is or is not the case