Question

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: 1.as the price level for outputs falls, with the price of inputs remaining fixed 2.as the price level for outputs rises, with the price of inputs remaining fixed 3.as the price level for outputs rises, with the price of inputs rising too4. as the price level for outputs falls, with the price of inputs increasing

Answer 1

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

Step-by-step explanation:

In the short run, the aggregate supply curve slopes upwards because the price of goods and services, or in other words, the price of the ouputs that firms produce, is expected to rise, incentivizing firms to produce more.

On the other hand, the price of inputs, and especially, the price of labor (wages) will remain the same in the short-run because wages are sticky, and do not respond to market forces as quickly as the price of goods and services.

Therefore, if what the firm sells is increasing in price, but the labor it hires continues to have the same wage, the firm has even more incentive to produce more, because it will make a higher profit due to the difference between sales revenue and wage expenses.