As a result of inflation impacting consumer goods more quickly than inputs, what happens to short run production as inflation increases?

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Restating the question and options for clarity:
Question: As a result of inflation impacting consumer goods more quickly than inputs, what happens to short run production as inflation increases?
Answer options:
- It falls.
- It rises.
- It remains unchanged.
- It moves ambiguously.

Option 1: It falls. This would imply that inflation harms production by increasing input costs or reducing profitability. However, the scenario specifies consumer goods prices rise more quickly than input costs, which tends to boost firms' margins in the short run, not reduce them. Therefore, this option misattributes the direction of the impact on production.

Option 2: It rises. In the short run, if the prices of the final goods rise faster than the costs of inputs, firms see higher revenue relative to an existing cost structure. With sticky input costs (costs that don’t adjust immediately), profit per unit can increase, providing an incentive to produce more. This aligns with standard short-run analysis under differential price changes between output and inputs, making this option the correct interpretation of the scenario.

Option 3: It remains unchanged. This would require input and output prices to move in lockstep or for firms to have perfectly flexible inputs that instantly offset any price changes. The given condition—consumer goods inflating faster than inputs—disrupts such balance, so assuming no change in output is inconsistent with the described inflation dynamic.

Option 4: It moves ambiguously. An ambiguous or uncertain effect would be true if the relationship between output and price changes were unclear or if other countervailing factors dominated (e.g., demand shifts, capacity constraints). However, the prompt presents a specific relative price change between final goods and inputs, which provides a directional impulse for production in the short run rather than ambiguity.

In summary, the scenario creates higher relative prices for final goods than for inputs, improving short-run profitability for producers and encouraging higher output. This aligns with Option 2: It rises.

2025Fall-ECN3615-01 Final Exam Practice Quiz

As a result of inflation impacting consumer goods more quickly than inputs, what happens to short run production as inflation increases?

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