What is the profit effect?
A)At equilibrium prices, when costs rise, profit margins are able to float with them and be passed along.
B)When the price level rises, output prices rise relative to input prices (costs), raising producers' short-run profit margins.
C)When the price level decreases, output prices rise relative to input prices (costs), raising producers' short-run profit margins.
D)It is only a long-run phenomenon.

Question

Quizplus · Accepted Answer

The profit effect refers to the increase in short-run profit margins that occurs when the price level rises and output prices rise relative to input prices (costs). This allows producers to earn higher profits even without increasing output or reducing costs.

What Is the Profit Effect