Question

1.

As a business owner, you find that your resource prices are increasing often. Because these costs are rising, you find it necessary to change your prices frequently. This best describes
1.a price confusion problem.
2.money illusion.
3.future price uncertainty.
4.hyperinflation.
5.menu costs.

9.Arguably, the increases in housing prices in 2005–2006 caused
1.a price confusion problem for producers.
2.a menu cost problem for producers.
3.a money illusion problem for producers.
4.a money illusion problem for consumers.
5.future price uncertainty for producers.

Answer 1

1. Option 5 - menu costs.

Menu cost is the cost that a firm faces when the input prices are changing very frequently. For example, if a restaurant owner finds that the prices of the vegetables are very volatile and they are rising at a high rate, then he would need to revise the price of his menu upward very frequently and he would have to print new menus very often. This is the menu costs.

Now, as a business owner if you find that your resource prices are increasing often and because these costs are rising, you find it necessary to change your prices frequently, it means that you have to incur costs to print your menu often which is why this situation best describes Menu Cost.

9. Option 4 - a money illusion problem for consumers.

Money illusion problem is when people think of prices of goods and services in nominal terms rather than in real terms, i.e. people don't take into account the inflation rate.

The increases in housing prices in 2005–2006 caused a money illusion problem for consumers because they did not take into account the inflation rate, rather they only saw the increase in housing prices was in nominal terms.