Consider the following statements when answering this question: 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.

Question

Quizplus · Accepted Answer

Statement I is true because in a perfectly competitive market, firms will produce at the point where price equals marginal cost. Therefore, any decrease in input prices will lead to a decrease in marginal cost, which will lower the price and benefit consumers.

Statement II is false because even in a competitive market, firms do have an incentive to control costs because it allows them to increase their profits. In a competitive market, firms cannot simply pass on cost increases to consumers because doing so will result in a decline in sales as consumers switch to cheaper alternatives. Therefore, firms will still try to minimize costs in order to maintain their competitive position.

Consider the Following Statements When Answering This Question: I