Final answer:
The increase in the price of a product due to increased production costs such as rising wages leads to economic losses for some firms, causing them to exit the market. This reduces supply, increases market price, and contracts output when firms adjust to earn zero economic profits.
Step-by-step explanation:
According to the price contusion problem, if the price of a product increases due to increased costs of production such as rising wages, this does not necessarily imply that the market demand has increased. Instead, it might mean that some firms are making economic losses and would shut down, leading to a shift of the supply curve to the left, which pushes the market price up. This situation ends when all firms remaining in the market earn zero economic profits, and results in a contraction of output in the market.
Therefore, when the price of a product increases, it is not correct to assume that the market demand has increased (option a) or that the firm's output should decrease (option b) based solely on the price change. It is not necessarily due to overall inflation (options c and d); neither does it imply that prices as a whole fall and the firm's output should increase (option e). Instead, it indicates an adjustment within the market due to increased production costs.