Question

Explain the concept of small menu cost and provide an example of this type of cost without using menus in the example

Answer 1

Menu cost can be seen as the costs which are incurred due to change in the prices. This can be understood by the typical example. Let us consider a restaurant manager is willing to implement price change, the cost incurred in changing the price so that the new prices can be mentioned must be accommodated in this decision. Thus it is important for the manager to determine whether this change or increase in the price will be able to cover up the printing cost of new menu or not.

This concept was explained by Gregory Makiw demonstrates in his article “Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly”, 1985. In his opinion, this menu cost would result in a non-socially optimal situation. In fact, Mankiw’s menu costs model explains the increase in the menu cost may create a situation in which there will be no change in the prices and thus it will result in so-called price stickiness.