In the short run, an increase in the average price level causes
A) profits to fall, and thus total production to decline.
B) profits to rise, and thus total production to increase.
C) profits to rise, and thus total production to decline.
D) input costs to fall, and thus total production to rise.
E) input costs to fall, and thus total production to decline.

Question

Quizplus · Accepted Answer

In the short run, an increase in the average price level can lead to higher profits because firms are selling their goods and services at higher prices, while their input costs have not yet adjusted to these price changes. This can encourage firms to increase total production to take advantage of the higher profit margins.

In the Short Run, an Increase in the Average Price