Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 24: Problem 7

What are menu costs? If menu costs were eliminated. would the short-run aggregate supply curve be a vertical line? Briefly explain.

Short Answer

Expert verified
Menu costs are costs associated with changing prices. If they were eliminated, the short-run aggregate supply curve wouldn’t necessarily be a vertical line, as there are other factors besides menu costs that can prevent immediate price adjustment such as imperfect information and labor contracts.

Step by step solution

01

Definition of Menu Costs

Menu costs in economics are the costs to a firm resulting from changing its prices. This can include tangible costs like creating and distributing catalogs with the new pricing, and intangible costs such as the effort required to calculate new pricing balances keeping profit margin intact and customer satisfaction high.
02

Understanding Short-Run Aggregate Supply Curve

The short-run aggregate supply curve is a graphical representation showing the relationship between the overall price level, and the quantity of goods and services produced by firms. In the short run, the aggregate supply curve is upward sloping. This means that as the price level rises, firms increase their quantities supplied.
03

Relationship Between Menu Costs and Short-Run Aggregate Supply Curve

Menu costs might cause firms to be sluggish in their response to changes in demand, which is why the short-run aggregate supply curve is upward sloping, not vertical. Firms are hesitant to adjust their prices because of the costs involved (menu costs). Thus it shows the positive relationship between the price level and the real GDP, indicating that firms produce more as the price level rises.
04

Hypothesis on Eliminating Menu Costs

Assuming that menu costs were eliminated, firms would adjust their prices instantly without any corresponding costs. But this does not guarantee that the short-run aggregate supply curve would be vertical. Even without menu costs, other factors like imperfect information, the time required to adjust production and labor contracts prevent instant price adjustment.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

As output increases along the short-run aggregate supply curve, briefly explain what happens to the natural rate of unemployment and to the cyclical rate of unemployment.

Why does the short-run aggregate supply curve slope upward?

An article in the Economist discussing the \(2007-2009\) recession stated that "employers found it difficult to reduce the cash value of the wages paid to their staff. (Foisting a pay cut on your entire workforce hardly boosts morale.)" a. During a recession, couldn't firms reduce their labor costs by the same, or possibly more, if they laid off fewer workers while cutting wages? Why did few firms use this approach? b. What does the article mean by firms reducing the "cash value" of workers' wages? Is it possible for firms to reduce workers' wages over time without reducing their cash value? Briefly explain.

Draw a basic aggregate demand and aggregate supply graph (with LRAS constant) that shows the economy in long-run equilibrium. a. Assume that there is a large increase in demand for U.S. exports. Show the resulting short-run equilibrium on your graph. In this short-run equilibrium, is the unemployment rate likely to be higher or lower than it was before the increase in exports? Briefly explain. Explain how the economy adjusts back to long-run equilibrium. When the economy has adjusted back to long-run equilibrium, how have the values of each of the following changed relative to what they were before the increase in exports? i. \(\quad\) Real GDP ii. The price level iii. The unemployment rate b. Assume that there is an unexpected increase in the price of oil. Show the resulting short-run equilibrium on your graph. Explain how the economy adjusts back to long-run equilibrium. In this short-run equilibrium, is the unemployment rate likely to be higher or lower than it was before the unexpected increase in the price of oil? Briefly explain. When the economy has adjusted back to long-run equilibrium, how have the values of each of the following changed relative to what they were before the unexpected increase in the price of oil? i. \(\quad\) Real GDP ii. The price level iii. The unemployment rate

An article in the Economist noted that "the economy's potential to supply goods and services [is] determined by such things as the labour force and capital stock, as well as inflation expectations." Briefly explain whether you agree with this list of the determinants of potential GDP.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free