People had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs. What could explain this?
A)Both sticky price theory and sticky wage theory
B)Sticky price theory but not sticky wage theory
C)Sticky wage theory but not sticky price theory
D)Neither sticky wage theory nor sticky price theory

Question

Quizplus · Accepted Answer

Both sticky price theory and sticky wage theory can explain this situation. Sticky price theory suggests that prices of goods do not adjust immediately to changes in economic conditions, so if Robinson Tire Company had set its prices expecting a price level of 120, an actual price level of 122 could mean higher than expected real revenues, encouraging the company to produce more and thus hire more workers. Sticky wage theory suggests that wages do not adjust quickly to changes in the labor market. If wages were set based on the expected price level of 120, and the actual price level is 122, the real wage is lower than anticipated, making labor cheaper for the company and potentially leading to increased hiring.

People Had Been Expecting the Price Level to Be 120