Question: Excersice 2. A partial/general equilibrium efficiency wage model In this exercise an efficiency wage model with one firm and a given revenue curve is considered.
Excersice 2. A partial/general equilibrium efficiency wage model
In this exercise an efficiency wage model with one firm and a given revenue curve is considered. This is like in a partial equilibrium model. However, one should think of the forms as representative, and therefore general equilibrium effects can be brought into the analysis.
The representative firm has a revenue function, 
with notation and assumptions as in section 11.2, and efficiency function:
Where 
is the employees outside option and 
is the real wage paid by the representative firm. (This is for
, while, 
is for 0 for 
)
- Write down the first-order conditions for the firms profit maximization problem with respect to
and 
. Derive the Solow conditions in this context and give the expression for the optimal wage as function of 
, 
, and 
.
Assume that the outside option is 
where 
is the unemployment rate, 
is the replacement ratio, and 
is the general real wage level.
RaL -1 - ': 0
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