Question

Musashi manages a grocery store in a country experiencing a high rate of inflation. To keep up with inflation, he spends a lot of time every day updating the prices, printing new price tags, and sending out newspaper inserts advertising the new prices. His employees regularly deal with customer annoyance over the frequent price changes. This is an example of the __________? of inflation.
a. menu costs
b. shoe-leather costs
c. unit-of-account costs

Answer 1

Answer: Menu cost

Explanation:

Menu cost is the cost to a firm due to constant price changes. The name was coined from restaurants who changed their prices constantly by printing new menus.

For a wider definition, the menu costs also include the re-tagging of items, updating of computer systems, and hiring consultants in order to develop new pricing strategies and the costs of printing menus.

Answer 2

Answer:

A) menu costs

Explanation:

The problem with inflation, is that it is hard to keep up with it. From an employees point of view, wages are sticky and unless your salary is updated very frequently, you will end up losing purchasing power due to inflation. For businesses things are also difficult, because prices are also sticky. They are not as sticky as wages, but it also costs money to keep updating prices constantly and it also hurts sales.

This is exactly what menu costs refer to, the cost of constantly changing and updating prices.