Question

Normally when aggregate demand increases, firms find it more profitable to raise prices than to leave prices unchanged The idea behind the small-menu-cost explanation for price stickiness is that firms will leave their prices unchanged If their profit gain from adjusting prices is less than menu costs they would Incur if they change prices If firms anticipate that a rise in demand is likely to last for a long time then they wi
ll be A. less likely to increase their prices since their future profits will be lower than the small, one-time menu cost
B. more likely to increase their prices since their future profits will be higher than the small one-time menu cost
C. more likely to increase their production since their More profits will be higher than the menu cost
D) less likely to increase their production since their future profits will be lower than the menu cost

Answer 1

Answer:

B) More likely to increase their prices since their future profits will be higher than the small one-time menu cost.

Explanation:

As the question explains, when aggregate demand is on the rise, firms find it more profitable to increase prices. As the economic scenario depicts a situation in which aggregate demand will rise for a long period, a firm will earn more revenue from raising prices than the menu costs it would incurr in doing so.