Question

Suppose that Techno TV produces LCD televisions. At a price of $2,000 per television, Techno determines that its optimal output is 3,000 television sets per week. If prices are sticky and fears of a recession reduce demand for LCD televisions, we would expect Techno to _________.a. raise prices in the short run to compensate for lost revenue. b. reduce output in the short run. c. reduce output in the long run. d. lower prices in the short run to offset the reduced demand

Answer 1

Answer: The answer is b. Reduce output in the short run.

Explanation: In production, to determine the quantity of products to supply, the demand of the consumer plays a very vital role. This is because the consumer demand will determine the price at which a company will sell its products.

In the case of Techno above, they would do well to reduce the output in the short run, since demand has reduced, pending when the demand increases. This is because if they maintain their current output of 3000 TV sets per week, they will sell less units and their revenue (price x quantity sold) will be lower than their cost and this will lead to them incurring loss.

So until the recession scare passes, output should be reduced in the short run.