Use the Following to Answer Questions

question 68

Multiple Choice

Use the following to answer questions :
Figure 3-2
-Let P* and Q* in Figure 3-2 represent market clearing price and quantity, respectively, of good Q.Given the supply and demand curves drawn in Figure 3-2, a reduction in the price of a substitute good for Q will cause:

• A)P* and Q* to climb.
• B)P* to climb while Q* declines.
• C)P* to climb while Q* holds fixed.
• D)P* to fall while Q* climbs.
• E)P* and Q* to fall.

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Definitions:

Coase Theorem

An economic theory that suggests that if trade in an externality is possible and there are no transaction costs, parties can negotiate solutions to conflict that lead to an efficient outcome regardless of the initial allocation of property.

Externalities

Economic side effects or by-products that affect an uninvolved third party; can be positive or negative.

Pollution Abatement

Measures and processes undertaken to reduce, control, or eliminate pollution from various sources.

Optimal Amount

The quantity of a good or service that yields the highest utility or benefits under specific conditions.