For example, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price , and the wages the firm pays its level of 100. If the actual price level turns out to be 110, the firm's output prices will the quantity of workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by output it supplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output supplied to the natural level of output in the short run.

For example, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price , and the wages the firm pays its level of 100. If the actual price level turns out to be 110, the firm's output prices will the quantity of workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by output it supplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output supplied to the natural level of output in the short run.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter12: The Partial Equilibrium Competitive Model

Section: Chapter Questions

Problem 12.14P

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