Assume Declining Profits in the Market for Internet Service Force

question 65

Multiple Choice

Assume declining profits in the market for Internet service force several firms in the area to drop out of the market.Which of the following best describes the effect of the reduction in the number of service providers and the subsequent adjustment of the market to the new equilibrium price and quantity?

• A)Quantity supplied would decrease, creating excess supply at the initial equilibrium price. Demand would then decrease until quantity demanded and quantity supplied are once again equal.
• B)Quantity supplied would decrease, creating excess demand at the initial equilibrium price. Demand would then decrease until quantity demanded and quantity supplied are once again equal.
• C)Supply would increase, creating excess demand at the initial equilibrium price. Price would then rise, causing quantity demanded to decrease and quantity supplied to increase until a new equilibrium is reached.
• D)Supply would decrease, creating excess demand at the initial equilibrium price. Price would then rise, causing quantity demanded to decrease and quantity supplied to increase until a new equilibrium is reached.

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Definitions:

Direct Labor

Labor costs associated with employees who are directly involved in the production of goods or the provision of services.

Indirect Labor

Describes labor costs associated with employees who do not directly work on a product, but whose services are necessary for the manufacturing process.

Work in Process

Inventory items that are in the process of being transformed from raw materials into finished goods but are not yet complete.

Overapplied Manufacturing Overhead

A situation where the allocated amount for manufacturing overhead costs exceeds the actual amount incurred.