QuoteIntense Q.. Su Styles 3 Consider the following hypothetical conversation Pe
ID: 1152646 • Letter: Q
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QuoteIntense Q.. Su Styles 3 Consider the following hypothetical conversation Person One: "Sticky prices are a factor in causing output to fall during a recession. Person Two: "That is just your opinion. I think markets work very well and prices are very flexible." For your post (you may want to review the discussion of positive and normative economics) . First, argue whether the positive statement by Person One is true or false. What evidence in supports your assertion of truth or falsity?I . Second, assess Person Two's response. Is there a problem with it? Explain. Hint: What is an opinion?Explanation / Answer
Question 1. Is person one's statement true or false?
Answer: Person one's statement is true. This is because at the time of recession due to sticky wage theory that says wages are sticky downwards, which means that wages are slow in moving downward while they increase faster. This means that the firm will have to maintain a certain price to deal with stickiness of wages. The firms also face imperfect information about the market situation and may think recession is for a short period and continue to maintain the price. Another situation is that firms may be a part of a contract with other firms and may have to maintain the price initially agreed upon. Also it is important to note that wage rates react very slowly market fluctuations. With respect to output, it will fall during recession. This is because even as wage rates do not fall, there will be a lay off of employees due to fall in overall sales. As prices do not fall and there is a slowdown of economic activity due to households choosing to save more , the sales get affected adversely and the firms decide to reduce output to try to influence demand.
Part 2: Assess person two's response to person one.
Answer: First, it is necessary to understand that markets have different types of goods which react differently to different economic conditions. Prices of some goods such as gasoline, gold and silver jewellery etc. are highly volatile and keep changing. This is because they are highly reactive to the economic conditions. This is influenced by the price of crude oil and gold availability. They are highly flexible due to competition from other sellers, the stock of raw materials available in relation to demand and the nature of seasonal demand associated with these goods.
Some goods on the other hand have sticky prices. Goods and services such as office stationery, haircut at a barbershop, wash at a laundromat etc are very slow in changing their prices. Hence, what the second person said is true and false depending on the goods in question.
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