UMass ECON 204 – Suppose that the firms’ markup over costs
b. Suppose that the firms’ markup over costs is 5% and the wage setting relation isW = P (1-u+z2); Where u is the unemployment rate; z is the reservation wagei) If u is 15%, what is the reservation wage as determined by the wage setting equation?ii) What is the real wage?iii) Suppose the mark-up increases to 10%. What happens to the naturalrate of unemployment for the same reservation wage?iv) Is the word “natural” in the natural rate of unemploymentappropriate? Why or why not? Describe in less than 5 sentences
