The fact that some resource prices are fixed by contracts helps explain why firms _____
A) increase output in the short run when the price level increases.
B) keep production levels constant in the short run when the price level decreases.
C) sell output in the short run at fixed prices.
D) increase output in the long run when the price level increases.
E) decrease production when nominal wages fall in the long run.

Question

Quizplus · Accepted Answer

When resource prices are fixed by contracts, firms can increase output in the short run when the price level increases because their costs do not immediately rise with prices, allowing them to make higher profits.

The Fact That Some Resource Prices Are Fixed by Contracts