As the economy approaches the peak phase of the cycle, profits will tend to: (a) decrease because of higher sales but lower prices (b) increase because of higher sales and higher prices (c) decrease because of lower sales (d) increase because of the elasticity of demand

Business Dec 23, 2020

As the economy approaches the peak phase of the cycle, profits will tend to:

(a) decrease because of higher sales but lower prices

(b) increase because of higher sales and higher prices

(d) increase because of the elasticity of demand

Expert Solution

The correct option is (b) increase because of higher sales and higher prices.

As the economy approaches the peak phase of the business cycle, the employment levels start to go up. Consumer confidence goes up and consumption expenditure increases. This leads to higher sales leading to higher profits. The prices go up because the aggregate demand goes up because of the increase in consumption expenditure.

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