Q2. Suppose that the markup of goods prices over marginal cost is 10% 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 equation? (b) What is the natural rate of unemployment? (c) Suppose that the markup of prices over costs increases to 20%. What happens to the natural rate of unemployment? Explain the logic behind your answer.

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Q2. Suppose that the markup of goods prices over marginal cost is 10% 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 equation?
(b) What is the natural rate of unemployment?
(c) Suppose that the markup of prices over costs increases to 20%. What happens to
the natural rate of unemployment? Explain the logic behind your answer.
Transcribed Image Text:Q2. Suppose that the markup of goods prices over marginal cost is 10% 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 equation? (b) What is the natural rate of unemployment? (c) Suppose that the markup of prices over costs increases to 20%. What happens to the natural rate of unemployment? Explain the logic behind your answer.
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