Because many resource prices are set by long-term contracts, in the short run
A) costs will increase by more than product prices when demand increases.
B) costs will decrease when the demand for products increases.
C) costs will increase by less than product prices when demand increases.
D) costs will decrease by more than product prices when demand decreases.

Question

Quizplus · Accepted Answer

Since resource prices are set by long-term contracts, in the short run the costs for producing products will not immediately reflect changes in demand. Therefore, when demand increases, product prices will increase but costs will only increase by a smaller amount, leading to higher profit margins for firms. Similarly, when demand decreases, product prices will decrease but costs will decrease by a larger amount, allowing firms to maintain profit margins.

Because Many Resource Prices Are Set by Long-Term Contracts, in the Short