The sticky-wage theory states that in the short run:

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Question restatement: The sticky-wage theory states that in the short run:

Option 1: wages do not adjust to changes in prices; therefore, real wages change and suppliers adjust their output levels
- This aligns with the core idea of sticky wages in the short run: wage rates are slow to adjust when the price level changes. As a result, when prices rise or fall while wages stay fixed, the real wage (wage/price) changes. Firms respond to these changes by altering output and employment to profit from misaligned real wages. The reasoning here follows standard short-run aggregate supply explanations that real wages move inversely with price level changes if wages are sticky.

Option 2: wages adjust to changes in prices; therefore, real wages are unchanged and suppliers do not adjust their output levels
- This describes a flexible-wage or classical view rather than a sticky-wage scenario. If wages adjusted instantly to price changes, real wages would remain constant, and producers would not need to change output in response to price-level fluctuations. This contradicts the premise of stickiness.

Option 3: wages adjust instantaneously to changes in prices
- This option directly contradicts the concept of sticky wages. Instant adjustment implies no real-wage movement in response to price changes, so there would be no need for firms to adjust output due to wage rigidity. It represents a fully flexible-wage framework, not a short-run sticky-wage one.

Option 4: none of the options are correct
- Given that Option 1 describes the standard short-run sticky-wage mechanism where wages are slow to adjust and real wages change with price changes, this option would be unfounded unless Option 1 were incorrect. Since Option 1 coheres with the sticky-wage idea, this option is not appropriate.

Summary of key ideas: The essence of sticky-wage theory in the short run is that nominal wages do not move quickly with price changes, which causes real wages to shift. As a consequence, firms modify their output and employment to respond to the resulting real-wage signal. The other options reflect either fully flexible wages (Option 3), complete wage-pass-through with no real-wage change (Option 2), or deny the validity of any option (Option 4), all of which misrepresent the sticky-wage concept.

23115 Economics for Business - Autumn 2025 Assessed Quiz 6 - AD-AS Model

The sticky-wage theory states that in the short run:

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