ECOS2002 - Tutorial 5
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ECOS2002 - Tutorial 5
1. Suppose that the firms’ markup over costs is 5 per cent, 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 10 per cent. What happens to the natural rate of unemployment? Explain the logic behind your answer.
2. The existence of unemployment
(a) Suppose the unemployment rate is very low. How easy is it for firms to find workers to hire? How easy is it for workers to find jobs? What do your answers imply about the relative bargaining power of workers and firms when the unemployment rate is very low? What do your answers imply about what happens to the wage as the unemployment rate gets very low?
(b) Given your answer to part (a), why is there unemployment in the economy? (What would happen to real wages if the unemployment rate were equal to zero?)
3. The Bathtub Model and JobKeeper and JobSeeker: Consider the bathtub model of unemployment given by
Et + Ut =
∆Ut+1 = sEt - fUt
where and denote the steady levels of unemployment and employment, re- spectively.
(a) Solve for the equilibrium (steady-state) unemployment rate. (Hint: ∆Ut+1 = 0)
(b) Assume a job separation rate of s = 1% and a job-finding rate of f = 20%. What is the corresponding equilibrium (steady-state) unemployment rate.
(c) What is the effect on steady state unemployment if the separation rate rises (s 企)?
(d) What is the effect on steady state unemployment if the job finding rate rises (f 企)?
(e) Think about policies that could affect equilibrium unemployment in this model.
4. Discussion
In the mid-1980s, a famous supermodel once said that she would not get out of bed for less than $10 000 (presumably per day). What is your own reservation
wage? Do you think most workers are paid their reservation wage? Discuss within your group!
2023-01-08