For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will, and firms that rely on catalogs will respond by the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease in the price level causes the quantity of output supplied to the natural level of output in the short run.

Question

Humberto Short

Business

5 March, 02:08

For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will, and firms that rely on catalogs will respond by the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease in the price level causes the quantity of output supplied to the natural level of output in the short run.

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Leanna Hall · Answer 1

Sales from catalogs will - Fall

Sales from catalogs will fall because the firms adjusted their prices to an index of 100, but the index turned out to be 90, so their goods and 10% higher than average, which will naturally reduce demand for them.

And firms that rely on catalogs will respond by - Decreasing - the quantity of output the supply

Because catalog firms will not sell as much, they will decrease the number of goods they produce and offer, with the goal of reducing costs.

The unexpected decrease in the price level causes the quantity of output supplied - to fall - below the natural level of ouput in the short run

Firms will artificially adjust their supply because of the differences in prices, will will cause a fall in the natural level of ouput in the short run.