Question

3. The Short-run Aggregate supply (AS) slopes up, because _______________________________________, firms have an incentive to produce more to earn higher profits.

Select the correct answer below:

as the price level for outputs falls, with the price of inputs remaining fixed

as the price level for outputs rises, with the price of inputs remaining fixed

as the price level for outputs rises, with the price of inputs rising too

as the price level for outputs falls, with the price of inputs increasing

Answer 1

3.

As it is known that short-run aggregate supply is upward sloping and in short-run some inputs are variable and some are fixed. Hence it can be said that the Short-run Aggregate supply (AS) slopes up, because as the price level for outputs rises, with the price of inputs remaining fixed firms have an incentive to produce more to earn higher profits.

This is because when price level rises and price of inputs are same, then the profitability of the firm increases because only variable cost is increasing and profit margin are increasing and therefore profit will increase more with the increase in the production level.

Hence option second is the correct answer.

Second; as the price level for outputs rises, with the price of inputs remaining fixed