In the short run, firms expand their production when the price level rises because
A) the higher prices allow the firm to hire more workers by offering higher wages, thereby increasing productivity and profits.
B) each firm must keep its production up to the level of its rivals, and some firms will expand production as the price level increases.
C) firms can increase their profits by increasing their maintenance.
D) the money wage rate remains constant so the higher prices for their product makes it profitable for firms to expand production.

Question

Quizplus · Accepted Answer

In the short run, firms cannot significantly alter their capital or labor resources, so they must produce with the resources they have on hand. This means that the money wage rate remains constant in the short run. When the price level rises, the higher prices for their product make it profitable for firms to expand production, because the revenue from selling additional units of output exceeds the cost of hiring additional labor or using additional materials. Therefore, firms expand their production when the price level rises because the higher prices make it profitable for them to do so.

In the Short Run, Firms Expand Their Production When the Price