Tutorial 3 week 5 - Tutorial 3 Week 5 Group 5 1 Markups...

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Tutorial 3 – Week 5 Group 5
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1) Markups Suppose that the firms’ markup over costs is 50%. The (medium-run) wage-setting equation is W=P(1-u) 2 z a. What is the real wage as determined by price-setting equation? Answer w/p =1/(1+m)  1/1+.5= 0.6666 b. What is the natural rate of unemployment, when z=0.8 ? Answer 0.6666=(1-u) 2 x 0.8  1-u=0.9129 u=0.0871 = 8.71% c. Suppose that the markup decreases to 40%. What will happen to the natural rate of unemployment? What may cause the markup to decrease? Answer (1-u) 2 x 0.8 = 1/(1+0.4)  1-u=0.9449  u=0.0551= 5.51% Reduction in imperfect competition in goods market may cause the markup to decrease, which will increase the real wage. We see from comparison of two recent values of u that this reduction in m caused a reduction in u.
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d. Suppose the proportion of part-time workers in the economy decreased. What effect would that have on the relative bargaining power of workers, and thus on z and the natural rate of unemployment?
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