Problem set 6 F06

Problem set 6 F06 - Problem set #6 (due on Thursday,...

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Problem set #6 ( due on Thursday, November 30, in class ) 1. Suppose you are given an economy where only bread is produced and consumed. Suppose further that a loaf of bread costs $2, and since only bread is produced the price level in the economy is P=2. Workers in the factories for bread would like to consume 300 breads per year which is equivalent to the annual real wage (the wage in terms of bread). The Union of Bread-making Workers has to negotiate a labor contract with the factor managers for the next two years. Workers and their representatives assume that there will be no changes in the price level in the next two years, so their expected price level is $2 per bread. a) What is the nominal wage workers and their union will demand? b) Assume now that managers agree to pay the demanded W from part a). But after a year the price of bread increases by 100% to $4. Does the real wage change and if yes by how much? c) What is the effect of the change in real wage in part b) on the managers decision to
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Problem set 6 F06 - Problem set #6 (due on Thursday,...

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