Strategic complementarities may help explain business cycles because such complementarities may lead to
A) decreasing returns to scale.
B) constant returns to scale.
C) increasing returns to scale.
D) a downward-sloping labor supply curve.

Question

Quizplus · Accepted Answer

Strategic complementarities occur when the payoff to one individual's decision depends positively on the decision of another individual. In this setting, increasing returns to scale may arise where each individual's decision reinforces the other's decision, leading to a positive feedback loop and amplifying the effects of shocks to the economy. This can lead to booms and busts in economic activity, consistent with business cycles.

Strategic Complementarities May Help Explain Business Cycles Because Such Complementarities