We assume flexible prices in the long run, but whenever it is costly to change prices (menu costs) or when there are long-term contracts for labor or capital:
A) short-run prices tend to be flexible.
B) short-run prices tend to be sticky.
C) long-run prices tend to be sticky.
D) firms have to pay higher costs and therefore have to raise prices.

Question

Quizplus · Accepted Answer

Whenever there are menu costs or long-term contracts for labor or capital, firms may find it costly or difficult to change prices in the short run. Therefore, short-run prices tend to be stickier than in the long run, where firms have more flexibility to adjust their prices to changes in demand or supply.

We Assume Flexible Prices in the Long Run, but Whenever