According to the profit effect,
A)Some costs do not rise when average prices rise.
B)The aggregate supply curve is vertical in the short run.
C)The aggregate supply curve has a negative slope.
D)All costs rise when average prices rise.

Question

Quizplus · Accepted Answer

According to the profit effect, some costs, such as fixed costs, do not vary with changes in output or average prices. This is because fixed costs are already incurred and cannot be changed in the short run. As a result, when average prices rise, firms are able to earn higher profits since their costs are not increasing at the same rate as their revenues. This leads to an increase in output and an upward shift of the short-run aggregate supply curve.

According to the Profit Effect