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:

Law Of Diminishing Returns

An economic principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if all other variables remain at a constant.

Marginal Output

The additional quantity of a product that is produced from using one more unit of an input, keeping other inputs constant.

Diminishing Returns

A principle stating that if one factor of production is increased while other factors are held constant, the incremental output or benefit gained will eventually decrease.

40-Acre Farm

A piece of farmland covering 40 acres, often used historically in the context of post-Civil War land redistribution promises in the United States.