Would firms have an incentive to change their level of production if input prices adjusted immediately to output price changes?

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Coconut

Business

10 May, 06:16

Would firms have an incentive to change their level of production if input prices adjusted immediately to output price changes?

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Talia Ayala · Answer 1

Firms have no incentive to increase production to take advantage of higher prices if they simultaneously face equally higher resource prices. So the answer to this question is No. The availability and productivity of real resources is reflected in the prices of inputs, and in the long run these input prices (including wages) adjust to match changes in the price level.