Question

a.Consumer confidence increases. What is the level of real GDP in long run?

b.When the price level rises, what happens to firms’ profit in short run?

Answer 1

Consumer confidence & level of GDP in long run
Consumer confidence refers to the confidence gained by the consumers from the performance of the economy. A higher confidence on the economy encourages the consumer to consume more and leading to an increase in the level of demand of the economy. An economy which fails to acquire the confidence of the consumer may not be able to attain a better performance. Even though the effect of consumer confidence affects short run period, the chance of a better performing economy to attain more is high with a high confidence from the part of consumers. Firms who may recognize the confidence of the consumers demanding more can supply more enough to meet the necessary demand. This can further develop the performance of the economy in a long run manner. Thus consumer confidence can expand the economy by expanding the consumption level and thus attaining an increase of efficient real GDP in the long run.

Price level & Firms profit in the short run
Price level since affected every part of the economy, it may not helps in increasing profit of the firms in short run. A firm in a perfect competition is advised to produce where the marginal cost is equal to the price of the commodity. A price level can affect the price of the output. An increased price level may increase the price of the output along with increase in price of the input. Firms could only be able to gain when they are able to produce at reduced input price and an increased output price. Since the price level can affect both the input and output, firms need to analyze the change in price and act accordingly. A higher change in the price of a commodity they produce due to change in price level and comparatively a lower change in the price of input, the firm will be able to supply more and can earn profit in the short run. Also, an increase in the price of input than the output they produce may leads the firm to lose.