Sticky Prices and Wages Are Often Cited as an Example

question 3

Essay

Sticky prices and wages are often cited as an example of market inefficiency. For example, many firms, during recessions, lay off workers. Yet many of these same firms are reluctant to begin hiring, even as the economic situation improves. Can you provide an explanation for this behavior that might demonstrate that it is rational?

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Definitions:

Dividend Increase

An action by a corporation to raise the amount of dividends paid to its shareholders.

Constant Annual Dividend

A fixed dividend amount paid to shareholders every year, without variation.

Rate of Return

Change in an investment's value within a predetermined interval, indicated as a percent of the investment's initial cost.

Annual Dividend

The total amount of dividend payments made to shareholders over the course of a year, often used as an indicator of a company's financial health.