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.

Question

Quizplus · Accepted Answer

When prices drop in response to a decline in demand for an increasing cost industry, the supply of inputs is likely to be divided into two categories - elastically supplied and inelastically supplied inputs. In this case, rent earned by elastically supplied inputs will decline by less than rent earned by inelastically supplied inputs. This is because elastically supplied inputs adjust more easily to changes in prices, whereas inelastically supplied inputs are less flexible and cannot adjust as easily. Therefore, the decline in demand will have a greater impact on inelastically supplied inputs, leading to a greater decline in their rents, compared to elastically supplied inputs.

When Prices Drop in Response to a Decline in Demand