1215

Consider the following two final consumer goods:

Good W requires the inputs of raw material R and intermediate goods S and T.
Good X requires the inputs of raw material R and intermediate goods U and V.

If demand for Good W increases and demand for Good X decreases, which of the following outcomes is least likely?

A) Some of raw material R will be diverted away from the producers of Good X.

B) More resources will be devoted to producing Good W and less to producing Good T.

C) The price of Good U will decrease and the price of Good S will increase.

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If demand for Good W increases and demand for Good X decreases, the market will allocate more resources to producing Good W and the goods that go into producing Good W (that is, Good S and Good T), and less to producing Good X and the goods that go into producing Good X (that is, Good U and Good V). Changes in the relative prices of all these goods are the signal that tells their producers where to direct resources. Prices will increase for goods W, S and T while prices decrease for Goods X, U and V.

1215

Which of the following statements regarding deadweight loss is least accurate?

A) An overproduction of goods can lead to a reduction in consumer surplus.

B) Deadweight loss from underproduction leads to a loss of producer surplus but not consumer surplus.

C) Deadweight loss occurs when the quantity supplied does not maximize the sum of consumer and producer surplus.

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Deadweight loss is the reduction in consumer and producer surplus due to underproduction or overproduction.