Question

the aggregate supply curve is likely to be nearly vertical for output levels close to capacity because:
a) price and wages are above their equilibrium levels
b) at output levels close to capacity the additional cost of producing more output is likely to be very high
c) interest rates are very and therefore investments will be decreasing
d) aggregate demand is high

Answer 1

Answer

The aggregate supply curve is likely to be nearly vertical for output levels close to capacity because:

b) at output levels close to capacity the additional cost of producing more output is likely to be very high

Reason:

The production costs are of two types: Fixed Costs and Variable Costs. When output levels are close to capacity, for producing additional capacity, one has to incur further additional costs like buying new machine, renting out more warehouse space etc. This increases the Total Costs considerably.

Thus, once the output capacity is reached, the supply curve is nearly vertical.

answered by: anonymous