Question

Consider the following statements when answering this question

Please provide detail explanation for each statemnet

I.    When a competitive industry's supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are consumers.

II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers.

A) I and II are true.

B) I is true, and II is false.

C) I is false, and II is true.

D) I and II are false.

Answer 1

Answer B is right answer

When a competitive industry's supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are consumers is true statement while Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers is false statement.

• Producer surplus for the whole market can be though of as total profit plus factor rents earned by lower cost firms.
• The consumer's gain from the imposition of a price ceiling is higher when the own price elasticity of market demand is low and the price elasticity of market supply is low.