Assume a Competitive Industry Produces Widgets Using Labor and Capital

question 14

Multiple Choice

Assume a competitive industry produces widgets using labor and capital in fixed proportions.Both input supply curves slope upward.The government considers the equilibrium price of widgets to be too high and imposes a price ceiling that is below the equilibrium price.Which of the following is most likely to occur?

• A)The sales of widgets will increase and the prices and employment of both inputs will rise.
• B)The sales of widgets will decline and the prices and employment of both inputs will remain unchanged.
• C)The sales of widgets will decline and the prices and employment of both inputs will fall.
• D)The sales of widgets will increase and the prices and employment of both inputs will fall.

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Definitions:

Heterogeneous Expectations

A financial theory assumption that different investors have varied predictions about future market or asset performance.

Holding Period

The duration between the purchase and sale of a security or investment.

Price Takers

Parties in a market who accept prevailing prices because they have no power to influence the market price due to their small scale of operations or the competitive nature of the market.

Capital Gains

The amount by which the sale price of a security exceeds the purchase price.