When Prices Drop in Response to a Decline in Demand

question 9

Multiple Choice

When prices drop in response to a decline in demand for an increasing cost industry

• A)producer surplus will increase but rents may decrease.
• B)rent earned by elastically supplied inputs will decline by more than rent earned by inelastically supplied inputs.
• C)rent earned by elastically supplied inputs will decline by less than rent earned by inelastically supplied inputs.
• D)both producer surplus and rents will increase.

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Definitions:

Predetermined Overhead Allocation Rate

A calculated rate used to apply manufacturing overhead costs to specific jobs or production units based on estimated costs and activities.

Direct Labor Cost

The expense incurred by companies for wages, benefits, and other costs directly associated with the employment of workers who physically produce a product or service.

Equivalent Finished Units

A calculation in cost accounting that converts partially completed goods into a number of complete units for inventory costing purposes.

Direct Labor

The cost of wages for workers directly involved in the manufacturing or production of goods.