Question

If an upstream firm and a downstream firm have a

long−term

contract regarding the price of an​ input, a change in the market price of the input can result in either the upstream or downstream firm to incur opportunity cost.

A. ture

B. false

Answer 1

Here the correct answer is option A. 'true'. This given statement is true because generally upstream firms are involves with production of raw materials and the downstream firms are more closer to the end user or customer So this downstream firms are generally depended on the upstream firm for supply of input now if these two firms (upstream and downstream) have a long term contract of input price it's mean upstream firm will supply input to downstream firm at a fix price for a long time but when market price changes (increase or decrease) from contracts price then someone(upstream or downstream) have to incur the opportunity cost of this extra amount of price change of input. Which firms incurs the opportunity cost its depends upon that input price is decreases or increases.

Here option B. 'False' is not correct answer because This given statement cannot be false as we can see there is a opportunity cost due long term fixed price of input and someone has to incur this opportunity cost.