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, 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, monopolistically competitive firms have some market power, but not enough to completely ignore market demand. As demand increases, these firms may choose not to increase their price because the cost of changing prices (e.g. updating menus, printing new labels, etc) may exceed any potential benefit to the firm. This is known as a menu cost, and is a key reason why prices may be inflexible in the short run.

In the New Keynesian View,a Monopolistically Competitive Firm May Fail