If Firms Have Rational Expectations and If They Set Prices

question 58

Multiple Choice

If firms have rational expectations and if they set prices and wages on this basis, then prices and wages

• A) will always be at market-clearing levels.
• B) will, on average, be set at market-clearing levels.
• C) will always be above market-clearing levels.
• D) will never be set at market-clearing levels.

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Definitions:

Risk-averse

Describes individuals or entities that prefer to avoid risk and would rather settle for a less uncertain outcome than a potentially higher but risky return.

Expected Income

The amount of money an individual or entity anticipates to receive over a certain period, often based on current or past earnings.

Risk-averse

Describes individuals or entities that prefer to avoid risk and choose the option with the least uncertainty and potential for loss.

Subjective Probabilities

Probabilities based on personal judgment and beliefs rather than objective data or mathematical calculations.