Menu costs refer to the costs that firms incur when adjusting prices, such as printing new menus or updating websites. These costs can make firms hesitant to change prices frequently, leading to sticky prices. As a result, when there is a shock to the economy, such as a decrease in consumer demand, firms may be slow to adjust prices downward, leading to excess supply and a recession.
Efficiency wage hypothesis, on the other hand, posits that paying workers higher wages can lead to increased productivity and lower turnover. However, if firms pay workers more than their marginal productivity, it can create an incentive for workers to shirk or not perform at their best. This can lead to inefficiencies and lower profits for firms, potentially leading to layoffs and an economic downturn.
In both cases, menu costs and efficiency wage hypothesis can create inefficiencies in the economy that can lead to recessions. Sticky prices due to menu costs can lead to prolonged periods of excess supply or demand, while overpaying workers based on the efficiency wage hypothesis can lead to decreased productivity and potential layoffs. These factors can contribute to economic recessions by creating imbalances in the supply and demand in the economy.
5. Explain on how Menu costs and Efficiency wage hypothesis can cause economic recessions
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