An increase in royalty may decrease output because:

Question

Quizplus · Accepted Answer

An increase in royalty reduces the profit margin for firms, which may lead to a decrease in output as firms may not find it profitable to produce at the current level or expand their operations. The other options do not necessarily lead to a decrease in output. Option A suggests that an incentive to innovate may increase output in the long run, Option B is ambiguous, and Option C suggests a decline in vital resources may cause a decrease in output, which is not specific to an increase in royalty.

An Increase in Royalty May Decrease Output Because