4. Suppose that the firms' mark-up over costs is 5% and the wage-setting equation is W...

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4. Suppose that the firms' mark-up over costs is 5% and the wage-setting equation is W = P(1-u) where u is the unemployment rate. (a) What is the real wage as determined by the price-setting relationship? (b) Solve for the natural rate of unemployment, that is, the rate of unemploy- ment at the real wage determined by the price setting relationship. You will need to use further information scattered through the chapter. (c) Using production function in expression (9.2), Y = N, and the notation that the total labour force is equal to L when employment equal N, solve for the natural level of output. Y₁ = N when employment is at the natural rate= (1-un) L. (d) Suppose that the mark-up of prices over costs increases to 10%. What happens to the natural rate of unemployment? Explain the logic behind the answer and the sense in which there is nothing "natural" about the natural rate of unemployment. 4. Suppose that the firms' mark-up over costs is 5% and the wage-setting equation is W = P(1-u) where u is the unemployment rate. (a) What is the real wage as determined by the price-setting relationship? (b) Solve for the natural rate of unemployment, that is, the rate of unemploy- ment at the real wage determined by the price setting relationship. You will need to use further information scattered through the chapter. (c) Using production function in expression (9.2), Y = N, and the notation that the total labour force is equal to L when employment equal N, solve for the natural level of output. Y₁ = N when employment is at the natural rate= (1-un) L. (d) Suppose that the mark-up of prices over costs increases to 10%. What happens to the natural rate of unemployment? Explain the logic behind the answer and the sense in which there is nothing "natural" about the natural rate of unemployment.

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Solution 4 a Price setting equation P 1 mW where m 005 By putting m into t... View the full answer