20072prbset5 - METU Department of Economics Econ 202...

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METU Department of Economics Econ 202 Macroeconomic Theory Instructors: Ebru Voyvoda and Ş irin Saraço ğ lu Teaching Assistant: Gizem Ko ş ar 2007–2008 Spring Semester Problem Set 5 (OB Chapter 6 and 7) PART A: Problems Question 1: Suppose that firms’ mark-up over costs is 20%, and the bargaining function is given by F(u,z) = z-180u, where z = 90, and 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 mark-up of prices over costs decreases by 10%. What happens to the natural rate? Explain the logic behind your answer. d) Suppose the labor productivity coefficient is 120, and the labor force is normalized to one. Calculate the natural levels of output implied by parts (b) and (c). Question 2: Discuss and show on a figure how the following changes would affect the Price Setting relation, Wage Setting relation, and their impact on u n and the real wage, W/P. a) A reduction in unemployment insurance b) A decrease in market competitiveness c) An increase in the minimum wage d) More stringent antitrust legislation e) A decrease in employment protection Question 3: Use the information provided below to answer the following questions.
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