Could anyone please explain why the answer (given in the solutions, at least) is A? I would have thought that B makes a little more sense... Thanks heaps in advance!
If firms expect prices to rise in future, then they are likely to hold back their output (as they'd rather sell it in the future rather than now) and so supply now might actually decrease. (Option A) Options B, C and D are actually given in the notes as reasons why prices and quantity supplied are usually directly related (Module 2). The explanation given for Option B is: "As firms supply more, beyond a certain output level, costs are likely to rise more and more rapidly. So, it will only be worthwhile producing more and incurring those higher costs if prices rise."
Thanks Charlie. I initially understood Option B (higher costs at higher levels of output) to mean diseconomies of scale, which would have the effect of decreasing quantity supplied if said diseconomies of scale were newly introduced.
