Why is the difference between the actual and expected rates of inflation important for explaining disinflation?
What will be an ideal response?
When the actual rate of inflation is lower than the expected rate of inflation, profits temporarily fall because the prices that firms charge for their products are falling faster than wage rates. (The nominal wage rates were based on a higher expected rate of inflation than actually exists.) With less revenue, firms cannot afford to employ more workers so the unemployment rate temporarily rises. In the long run, firms and workers adjust their expectations to the new lower rate of inflation. This means that the increase in nominal wages falls and the profits of firms rise. Firms can afford to hire more workers, so the unemployment rate falls and returns to its natural rate.
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Refer to Figure 3-5. In a free market such as that depicted above, a shortage is eliminated by
A) a price decrease, decreasing the supply and increasing the demand. B) a price increase, increasing the quantity supplied and decreasing the quantity demanded. C) a price increase, increasing the supply and decreasing the demand. D) a price decrease, decreasing the quantity supplied and increasing the quantity demanded.
The change in a firm's total cost from producing one more unit of a good or service is
A) the definition of marginal product B) the result of economies of scale. C) the definition of marginal cost. D) impossible to observe in large firms with many manufacturing plants.
Assume that you have taken over management of a small concession stand on a local beach for the summer. Your main product is iced water, popular on hot days. You’ve been selling 400 cups per day at 50 cents each. The cups cost 5 cents each. One of your customers suggests that you cut the price to 40 cents to make more money. For the customer to be correct, how much must your sales increase?
What will be an ideal response?
Suppose a firm that sells a variety of athletic shoes is trying to start a pattern of price leadership in its market. Which of the following is not a problem this firm might have to face?
a. Rivals recognize the intent of its actions. b. Other firms may not necessarily follow the leader. c. Other firms may not follow the leader but offer better service instead. d. Differentiation among products allows for more variation in price. e. The price leader must keep costs lower than other firms'.