Use the Figure Below to Answer the Following Question(s)

question 21

Multiple Choice

Use the figure below to answer the following question(s) .
Figure 5-2

-Figure 5-2 illustrates the market for a product that generates an external cost.S₁ is the private market supply curve,while S₂ is the supply curve including the external cost.Which of the following is true?

• A)Relative to economic efficiency,output of the good will be too large and the price too low.
• B)Relative to economic efficiency,output of the good will be too large and the price too high.
• C)Relative to economic efficiency,output of the good will be too small and the price too low.
• D)Relative to economic efficiency,output of the good will be too small and the price too high.

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Definitions:

Indirect Bankruptcy Costs

Indirect bankruptcy costs include the intangible costs related to the loss of business, customer trust, and employee morale that a company faces when going through bankruptcy.

M&M Proposition II

It refers to a theory related to capital structure, stating that a firm's cost of equity increases with leverage because the risk to equity holders increases.

Business Risk

The exposure a company or investor has to various factors that can lower its profits or lead to a loss.

Indirect Bankruptcy Costs

Costs associated with bankruptcy that do not involve direct cash payments, such as damage to a company's reputation or loss of customers.