In the short run, an increase in the price level induces firms to expand production because
A) prices of inputs are held constant, so the higher prices for firms' products imply that it is profitable to expand production.
B) each firm must keep its production level up to the level of its rivals, and some firms will expand production as the price level increases.
C) higher prices allow firms to hire more inputs by offering higher prices for inputs, which increases productivity and profits.
D) they can increase profits by increasing maintenance costs.

Question

Quizplus · Accepted Answer

In the short run, the cost of inputs remains constant, so increasing the price level will increase the profitability of firms' products. Therefore, firms will expand production to take advantage of the higher prices and increase their profits. Option B is incorrect because there is no obligation for firms to keep up with their rivals, and even if there was, it doesn't explain why they would expand production. Option C is incorrect because firms hiring more inputs would increase input costs, not profits, which conflicts with the initial assumption that input costs are constant. Option D is incorrect because increasing maintenance costs does not necessarily lead to an increase in production.

In the Short Run, an Increase in the Price Level