A Market Failure Is Most Likely to Occur When

question 58

Multiple Choice

A market failure is most likely to occur when:

• A) a sole producer of a good faces no threat of competition.
• B) several producers of a good compete for customers by having price wars.
• C) several producers of a good search for the lowest-cost method of production.
• D) many producers produce identical products, and only the consumers and producers are affected by the transactions.

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Definitions:

Price Floor

A government- or body-imposed price control or limit on how low a price can be charged for a product.

Surplus

The situation in which the quantity supplied of a product exceeds the quantity demanded at the current price.

Law of Supply

A fundamental principle of economics that states that, all else equal, an increase in price results in an increase in the quantity supplied, and vice versa.

Law of Demand

States that, all else being equal, as the price of a product decreases, the quantity demanded of the product will increase, and vice versa.