According to the menu cost theory,firms will be slow in changing their prices because
A)if prices changed frequently,individuals would reduce their demand for that good because of uncertainty.
B)frequent price changes would be a sign of monopolistic behaviour.
C)the cost of changing the price might exceed the additional revenue the price change would generate.
D)demand for their product would fall because consumers would purchase goods from firms that had not raised their prices.

Question

Quizplus · Accepted Answer

The menu cost theory states that firms will be slow in changing their prices because the cost of changing the price might exceed the additional revenue that the price change would generate. Therefore, option C is the best choice. Option A is incorrect because the theory does not mention uncertainty as a reason why firms are slow in changing their prices. Option B is incorrect because the theory does not suggest that frequent price changes are a sign of monopolistic behavior. Option D is incorrect because the theory does not state that demand for the product would fall because consumers would purchase goods from firms that had not raised their prices.

According to the Menu Cost Theory,firms Will Be Slow in Changing