If Firms Have Rational Expectations and If They Set Prices

question 160

Multiple Choice

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.

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Definitions:

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A temporary court order made to prevent an action being taken until a final decision is made by the court.