Question

Normally, when aggregate demand increases, firms find it more profitable to raise prices than to leave prices unchanged. The idea behind the small-menu-cost explanation for price stickiness is that firms will leave their prices unchanged if their profit gain from adjusting prices is less than the menu costs they would incur if they change prices. If firms anticipate that a rise in demand is likely to last for a long time, does this make them more or less likely to adjust their prices when they face small menu costs? (Hint: Profits are a flow that firms earn from week to week and month to month, but small menu costs are a one-time expense.)

Short answer

No, there's not any must adjust prices when firms are faced with small menu costs. the price levels are adjusted within the long term spontaneously.

Step-by-step solution

Introduction

That firms will leave their prices unchanged if their profit gain from adjusting prices might be a smaller amount than the menu costs they might incur if they alter prices. Therefore, there is not any should adjust the value levels. the value levels are adjusted within the long term spontaneously.

Explanation 

• It is interesting to notice that tiny menu costs discourage firms from fluctuating prices in response to demand changes.
• No, there's no must adjust prices when firms are faced with small menu costs because; aggregate demand is increased by fixed costs.
• means the firms are within the equilibrium level within the longer term which they go to induce more profits although they're facing small menu costs.