If firms have rational expectations and if they set prices and wages on this basis, then:
A) there are likely to be unexploited profit opportunities for extended periods.
B) they will perceive their prices have risen relative to other prices, and this leads them to produce more output.
C) they will still not know the demand curve for their output and the supply curve of labor that they face.
D) on average, prices and wages will be set at levels that ensure equilibrium in the goods and labor markets.

Question

Quizplus · Accepted Answer

With rational expectations, firms will set prices and wages at levels that ensure equilibrium in the markets for goods and labor. It may not be possible for them to know the exact demand and supply curves they face, but they will adjust their prices and output based on their perceptions of market conditions. This will lead to a stable equilibrium in the long run.

If Firms Have Rational Expectations and If They Set Prices