Question

Which of the following, if true, will indicate that higher prices will not induce firms to increase output?

A. The Milovian government offers subsidies on inputs used in many manufacturing industries
B. The increase in the price of inputs outweighed the increase in the price of the final product
C. In spite of rising inflation, people in Milovia expect real incomes to increase substantially in the next few years
D. The country's trade balance has been positive for the last five years
E. The government purchased bonds in an open market operation last year

Answer 1

Answer:

The correct answer is option B.

Explanation:

According to the law of supply, ceteris paribus, there is a direct relation between price level and quantity supplied. This means that supply will increase with the increase in price level but only if other factors are held constant.

The increase in price will not lead to increase in output if the price of inputs is also increasing and in greater proportion than price of the product. With the the increase in input price, the cost of production will also increase. So the firms will not increase output.