Question

Why does the price level not vary even if the quantity produced changes in the short run?

Options

• Because additional output can be produced without increasing marginal cost, owing to unused resources

• Because demand and supply simultaneously determine price and quantity

• Because the law of diminishing raises marginal cost as output expands

• Because the price level is allowed to vary only in Stage 1 of the analysis

Answer 1

With unused resources such as idle machineries, buildings, and labour, the law of diminishing returns does not apply, so additional output can be produced without increasing marginal cost. Since marginal cost does not rise, the price level does not vary even if the quantity produced changes.