In the new Keynesian view a monopolistically competitive firm may fail to increase the price of its product as demand increases because
A)if it does so it will lose all of its customers.
B)the cost to it of changing prices may exceed the benefit of doing so.
C)prices of monopolistically competitive firms are regulated by the federal government and may only be changed with permission.
D)for a monopolistically competitive firm, price is below marginal cost.

Question

Quizplus · Accepted Answer

In the new Keynesian view, a monopolistically competitive firm may fail to increase the price of its product as demand increases because the cost to it of changing prices may exceed the benefit of doing so. This is because monopolistic firms typically face menu costs, which are the costs of changing prices. These costs can include the time and money it takes to reprint menus, update computer systems, or inform customers of the new prices. As a result, firms may choose to keep prices unchanged, even as demand increases, in order to avoid incurring these costs.

In the New Keynesian View a Monopolistically Competitive Firm May