According to the aggregate supply curve, what happens as the price level increases?
(A) Consumers increase their spending.
(B) Profits decrease.
(C) Real GDP falls.
(D) Firms have more of an incentive to increase output.
Answer: (D) Firms have more of an incentive to increase output.
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Assume that the LCD and plasma television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run?
A) The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it will start earning positive profits. B) The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation. C) Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short-run profits because other firms would also innovate. D) This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation.
The major drawback of a price ceiling is
a. it causes a surplus. b. government regulations of this kind are difficult to enforce. c. it causes a shortage. d. There is no drawback.