When an External Cost Exists That Is NOT Taken into Account

question 223

Multiple Choice

When an external cost exists that is NOT taken into account in the production of a product,

• A) the level of output is too low, and the supply curve should shift to the right to account for the externality.
• B) the level of output is optimal, and there should be no change in the supply curve.
• C) the price of the product is too high, and production should be expanded to lower the price.
• D) the level of output is too high, and the supply curve should shift to the left to account for the externality.

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Definitions:

Credit Sales

Sales in which the customer is allowed to pay at a later time, typically generating accounts receivable on the balance sheet.

COGS

Cost of Goods Sold; the direct costs attributable to the production of the goods sold by a company, including materials and labor.

Payables Turnover Rate

A financial ratio indicating how efficiently a company pays its suppliers, calculated by dividing total purchases by average accounts payable.

Accounts Payable Balance

The total amount of money that a company owes to its suppliers or creditors for items or services purchased on credit.