Question

Which of the following statements about price stickiness or flexibility is true? Multiple Choice Prices of many raw materials are only slightly more flexible than the prices of final goods and services. Prices of many raw materials are much more flexible than the prices of final goods and services. Prices of many raw materials are less flexible than the prices of final goods and services.

Answer 1

Answer:

The correct answer is: Prices of many raw materials are much more flexible than the prices of final goods and services.

Explanation:

Price stickiness implies that the price of products does not change with changes in demand or supply. There are several reasons for the price rigidity of goods. It is the resistance to the price of products to change when there is a change in the cost of production.

The price of inputs or raw materials is generally more flexible than the price of products. This is because of several reasons. There are menu costs involved in the changing price of products. The wages are generally rigid and do not change in the short term. This makes the price of the product rigid as it must cover all costs of production including wages.