if the cost of plaster and labor were $5 per gnome and everything else is as in the problem (gnome molds cost $1,000, interest rate is 10%) , what is the lowest price of gnomes at which there would be a positive supply in the long run?

A) $5
B) $10
C) $7.20
D) $5.50
E) $6

In the long run, the price needs to cover the total cost of production, including the cost of molds, plaster, labor, and interest. The total cost per gnome can be calculated as:

Total Cost = Cost of molds / Number of gnomes + Cost of plaster and labor
Total Cost = $1,000 / 2,000 gnomes + $5 per gnome
Total Cost = $0.50 + $5
Total Cost = $5.50 per gnome

To ensure a positive supply in the long run, the price needs to be higher than the total cost. Therefore, the lowest price of gnomes should be higher than $5.50 per gnome. Among the given choices, the only option that satisfies this condition is $7.20 per gnome (Choice C). Any lower price would result in a negative supply in the long run.