Consider an economy consisting of some firms with flexible prices and some with rigid prices. Let på denote the price set by a representative flexible-price firm and p' the price set by a representative rigid-price firm. Flexible-price firms set their prices after m is known; rigid-price firms set their prices before m is known. Thus flexible-price firms set pf = p; = (1 − p)p + óm, and rigid-price firms set p' = Ep? = (1 − ¢ )Ep + ¢ Em, where E denotes the expectation of a variable as of when the rigid-price firms set their prices. Assume that fraction q of firms have rigid prices, so that p = qp² + (1 − q)pf. (a) Find pf in terms of p',m, and the parameters of the model (o and q). (b) Find p' in terms of Em and the parameters of the model. (c) (i) Do anticipated changes in m (that is, changes that are expected as of when rigid-price firms set their prices) affect y? Why or why not? (ii) Do unanticipated changes in m affect y? Why or why not?

Consider an economy consisting of some firms with flexible prices and some with rigid prices. Let på denote the price set by a representative flexible-price firm and p' the price set by a representative rigid-price firm. Flexible-price firms set their prices after m is known; rigid-price firms set their prices before m is known. Thus flexible-price firms set pf = p; = (1 − p)p + óm, and rigid-price firms set p' = Ep? = (1 − ¢ )Ep + ¢ Em, where E denotes the expectation of a variable as of when the rigid-price firms set their prices. Assume that fraction q of firms have rigid prices, so that p = qp² + (1 − q)pf. (a) Find pf in terms of p',m, and the parameters of the model (o and q). (b) Find p' in terms of Em and the parameters of the model. (c) (i) Do anticipated changes in m (that is, changes that are expected as of when rigid-price firms set their prices) affect y? Why or why not? (ii) Do unanticipated changes in m affect y? Why or why not?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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