Assume That the Production of a Good Imposes External Costs

question 112

Multiple Choice

Assume that the production of a good imposes external costs upon third parties. If the price and quantity of this good is set by supply and demand the price will be too:

• A) high and quantity too low for efficient resource allocation.
• B) low and quantity too low for efficient resource allocation.
• C) low and quantity too high for efficient resource allocation.
• D) high and quantity too high for efficient resource allocation.

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Definitions:

Increase Price

A decision by a supplier or manufacturer to raise the cost at which goods or services are sold.

Complement Good

A product that is used together with another product, where the use of one increases the demand for the other.

Substitute Good

A product or service that can be used in place of another to satisfy the same need or desire.

Price Sensitive

Being price sensitive means the demand for a product or service is highly influenced by changes in its price, where consumers may alter their buying habits significantly in response to pricing adjustments.