money illusion

money illusion - the value X in year one and then fail to...

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Ryan Wisneski ECO 3933 February 7 th , 2011 Describe two instances, or one in great detail, in which private firms succumb to the money illusion bias that are not mentioned in the paper. When we look at money illusion in the private sector it is much more difficult to find a company that yields to this bias based on the financial incentives than that of the average person. More generally, private firms can be expected to be careful in assessing the net returns to be derived from any situations that may involve the falsity of money illusion since their survival as enterprises is at stake. These forms of money illusion do still take place however with regards to the detriment of the business, one of these being the selling of goods or services for prices that do not reflect the current inflation. One such instance for example would be a business in which they sell their product for
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Unformatted text preview: the value X in year one and then fail to adjust to the real value that arises in year two as a result of inflation. Say inflation in the Us economy is 2% across the board and this firm in the private sector either fails to adjust to these real term or only consider the nominal values resulting in a loss for the firm. This failure to adjust is extremely costly to the firm and could no doubt result in a permanent closing of the business. Such an instance although unlikely, based on the financial importance of this decision for the firm, can be found based on certain circumstances that prohibit the firm from properly recognizing the inflated economy. Another situation in which price illusion could arise in the private sector would be when company is selling either goods or services to a consumer...
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