Suppose the actual price level exceeds the expected price level reflected in long-term contracts.How will firms respond?
A) Firms will find production more profitable than they had expected, and will increase the quantity of output supplied.
B) Firms will find production less profitable than they had expected, and will decrease the quantity of output supplied.
C) Firms will find production more profitable than they had expected, and will decrease the quantity of output supplied.
D) Firms will find production less profitable than they had expected, and will increase the quantity of output supplied.

Question

Suppose the actual price level exceeds the expected price level reflected in long-term contracts.How will firms respond?  
A) Firms will find production more profitable than they had expected, and will increase the quantity of output supplied. 
B) Firms will find production less profitable than they had expected, and will decrease the quantity of output supplied. 
C) Firms will find production more profitable than they had expected, and will decrease the quantity of output supplied. 
D) Firms will find production less profitable than they had expected, and will increase the quantity of output supplied.

Quizplus · Accepted Answer

If the actual price level exceeds the expected price level, it means that firms will be earning higher profits than they had anticipated when they signed long-term contracts. This would encourage firms to increase their output in order to take advantage of the higher prices and thus increase their profits. Therefore, firms will find production more profitable than they had expected, and will increase the quantity of output supplied.

Suppose the Actual Price Level Exceeds the Expected Price Level