Suppose That Pasta Is Produced Under Conditions of Perfect Competition

question 222

Multiple Choice

Suppose that pasta is produced under conditions of perfect competition and that the constant-cost industry is initially in long-run equilibrium. Now suppose there is an increase in the price of wheat, which is a key ingredient in producing pasta. Further assume that the price elasticity of demand for pasta is -1.8. After all long-run adjustments have occurred, we would expect total consumer spending on pasta to have:

• A) risen.
• B) fallen.
• C) remained the same.
• D) first fallen, then risen, then returned to the original level of expenditures.

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Definitions:

Capacity

The maximum output that a company can produce under normal conditions.

Marginal Costs

The surge in all-encompassing cost following the production of an additional unit of a product or service.

Demand for Wine

The desire or need for wine that consumers are willing and able to purchase at various prices.

Cournot Duopolists

Two firms competing in the same market, where each chooses its quantity of output independently and simultaneously, anticipating the other's choice.