Suppose that a regulated industry experiences an increase in the price of inputs used to produce the good. Which of the following statements is TRUE?

Question

Quizplus · Accepted Answer

In the capture theory, the industry is able to pass on the increased cost to consumers more easily, which leads to a quicker increase in price. In contrast, the share-the-gains, share-the-pain theory suggests that both producers and consumers should share in the increased costs, which may take longer to negotiate and implement, slowing down the increase in price. Therefore, an increase in price will occur quicker in the capture theory than the share-the-gains, share-the-pain theory. Choice A is incorrect because in the share-the-gains, share-the-pain theory, profits may decrease for producers, but consumers may also benefit from lower prices. Choice B is incorrect as the opposite is true, and choice D is incorrect because an increase in price can occur in both theories.

Suppose That a Regulated Industry Experiences an Increase in the Price