The small-menu cost theory states that
A)prices are not fully flexible because it is costly for firms to change prices every time there is a demand change.
B)economic agents quickly learn the likely responses of the Bank of Canada to changes in unemployment.
C)wages depend on the productivity of workers.
D)the economy is characterized by perfect competition.

Question

Quizplus · Accepted Answer

The small-menu cost theory states that firms face costs of changing prices frequently, so they prefer to stick to a small set of fixed prices, which prevents them from fully adjusting to changes in demand. Therefore, prices are not fully flexible, which is directly related to the small-menu cost theory.

The Small-Menu Cost Theory States That