A5-7. In an economy with a mix of price-taking and price-setting firms, the short-run aggregate supply curve will be horizontal. True, False, and Uncertain? Explain in detail.
Correct Answer:
False
In an economy with a mix of firms,
where some firms are price takers and some firms are price makers,
the aggregate supply curve will be upward sloping in nature in the
short run. Here, the upward sloping curve can be steep or
flattening, depending upon the nature of firms, their price taker
or price maker behavior as well as elasticity of supply. For
example,more number of firms with a relatively inelastic
supply, will make short run curve to be a steeper than usual. In
reverse, more number of firms with elastic supply will take a
flatter shape. Collectively, it will make upward sloping supply
curve in aggregate in the short run.
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