Forty years ago, economist and Nobel Laureate Robert Lucas, Jr., likened the economy to a set of islands, where information about changes in demand flowed but not evenly nor immediately. His analogy reflected the fact that businesses do not know if a surge in demand is unique to them or widespread.

a) Explain how this informational uncertainty can affect a firm’s demand for labor.

b) If you could measure the speed with which such information flows, what changes in the past 40 years would affect this flow of information?

c) Given the changes noted in (b), would you expect prices and price changes to be more or less uniform across the economy?