Read the statements below and chose the correct option.Statement 1: The higher the price of the good, the more profitable it becomes to produce and firms will thus be encouraged to produce more of it by switching from producing less profitable goods.Statement 2-If the price of a good remains high, new producers will be encouraged to set up in production. Total market supply thus rises. Group of answer choicesStatement 1 and 2 apply to the long periodStatement 1 and 2 apply to the short periodStatement 2 applies to the long period and statement 1 to the short period.Statement 1 applies to the long period and statement 2 to the short period.
Question
Read the statements below and chose the correct option.Statement 1: The higher the price of the good, the more profitable it becomes to produce and firms will thus be encouraged to produce more of it by switching from producing less profitable goods.Statement 2-If the price of a good remains high, new producers will be encouraged to set up in production. Total market supply thus rises. Group of answer choicesStatement 1 and 2 apply to the long periodStatement 1 and 2 apply to the short periodStatement 2 applies to the long period and statement 1 to the short period.Statement 1 applies to the long period and statement 2 to the short period.
Solution
To determine the correct option, let's analyze each statement in the context of short and long periods:
Statement 1: "The higher the price of the good, the more profitable it becomes to produce and firms will thus be encouraged to produce more of it by switching from producing less profitable goods."
- This statement suggests that firms will adjust their production based on profitability. In the short period, firms can switch their resources to produce more of the profitable good, but they are limited by their existing capacity and resources. Therefore, this statement is more applicable to the short period.
Statement 2: "If the price of a good remains high, new producers will be encouraged to set up in production. Total market supply thus rises."
- This statement implies that new firms will enter the market if the price remains high, which typically requires time for new firms to establish production facilities, acquire resources, and start operations. This process is more characteristic of the long period.
Based on this analysis, the correct option is:
Statement 2 applies to the long period and statement 1 to the short period.
Similar Questions
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