In the short run,a decrease in the price level induces firms to contract production because
A)prices of inputs are held constant so the lower prices for their product implies that it is not profitable to contract production.
B)each firm must keep its production level at the level of its rivals,and some firms will contract production as the price level decreases.
C)the lower prices allow the firm to hire more inputs by offering higher prices to the inputs,which increases productivity and profits.
D)they can increase profits by increasing maintenance costs.

Question

Quizplus · Accepted Answer

When the price level decreases, firms receive lower revenue from selling their products. Since the prices of inputs are held constant in the short run, the cost of producing the product remains the same. This implies that the profit margin for producing the product decreases or might even be negative. Hence, it is not profitable for firms to produce and they contract production.

In the Short Run,a Decrease in the Price Level Induces