Several factors contribute to the rigidity in wages and prices:

Get the full solved assignment PDF of MEC-102 of 2023-24 session now.

Contracts and Agreements: Long-term labor contracts and agreements often set wages for an extended period, limiting the ability to adjust salaries in response to changing economic conditions.
Minimum Wage Laws: Government-imposed minimum wage laws can create a wage floor, preventing wages from adjusting downward even in economic downturns.
Menu Costs: The costs associated with changing prices, known as menu costs, can discourage firms from adjusting prices frequently. These costs include updating price tags, advertising changes, and modifying computer systems.
Efficiency Wages: Firms may pay higher-than-market wages to motivate workers and improve productivity. This practice can lead to wage rigidity, as firms are reluctant to reduce wages even when economic conditions worsen.
Labor Union Influence: Collective bargaining by labor unions can result in fixed wage agreements that resist adjustments, contributing to wage rigidity.
Public Perception: Firms may be hesitant to lower wages due to potential negative effects on employee morale, productivity, and public perception.
Sticky Prices: Prices set by firms may be slow to adjust to changes in demand or supply due to factors such as price coordination, information lags, or reluctance to be the first to change prices in a market.
Inflation Expectations: Expectations of inflation can influence wage and price rigidity. If individuals and businesses expect inflation, they may resist nominal wage and price decreases.

These factors create inertia in the adjustment of wages and prices, contributing to the overall rigidity in the labor and product markets.