Which of the following represents the Lucas supply function?
A)Y = f(Pe - P)
B)Y = f(Pe + P)
C)Y = f(P + Pe)
D)Y = f(P - Pe)

Question

Quizplus · Accepted Answer

The Lucas supply function is represented by Y = f(P - Pe), where Y is output, P is the actual price level, and Pe is expected price level. This function suggests that output will increase with an increase in actual price level, holding expected price level constant. However, if expected price level increases, the supply function will shift leftward, with a decrease in output. This is consistent with the notion that firms adjust their output based on changes in market conditions and their expectations.

Which of the Following Represents the Lucas Supply Function