Assume the following general efficiency wage model. The function for worker effort at each firm is:...

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Assume the following general efficiency wage model. The function for worker effort at each firm is: e= W-X if w>x and 0 otherwise x=(1-bu)wa where w is the wage that an individual firm pays, 0<B<1, w, is the wage paid by other firms, b is a constant, and u is the unemployment rate. Also assume: π = F(el)-wL. (a) Solve for equilibrium unemployment assuming that all firms are identical and small relative to the economy. (b) Graph the equilibrium in (w, L) space. (c) What does this model predict will happen to the unemployment rate and real wage in the long-run if labour productivity rises and labour supply is constant (d) What does this model predict will happen to the unemployment rate and real wage in the long-run if labour productivity is constant but labour supply rises? b>0 Assume the following general efficiency wage model. The function for worker effort at each firm is: e= W-X if w>x and 0 otherwise x=(1-bu)wa where w is the wage that an individual firm pays, 0<B<1, w, is the wage paid by other firms, b is a constant, and u is the unemployment rate. Also assume: π = F(el)-wL. (a) Solve for equilibrium unemployment assuming that all firms are identical and small relative to the economy. (b) Graph the equilibrium in (w, L) space. (c) What does this model predict will happen to the unemployment rate and real wage in the long-run if labour productivity rises and labour supply is constant (d) What does this model predict will happen to the unemployment rate and real wage in the long-run if labour productivity is constant but labour supply rises? b>0

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a Equilibrium Unemployment In equilibrium firms set the wage to maximize their profits considering t... View the full answer