Question

Which of the following statements about the wage-setting curve is correct? (Justify the answer)

a) The wage-setting curve depicts the workers' reservation wage for different levels of economy-wide employment

b) At each point (U,w) on the wage-setting curve, the workers are choosing their best response effort level given the real wage w and unemployment rate U.

c) A lower unemployment rate shifts down the wage-setting curve

d) An exodus of European workers as a result of the Brexit would result in a downward shift of the UK's wage-setting curve

Answer 1

Option B.

• The statement that is true about a wage setting curve is :- At each point (U,w) on the wage setting curve, the worker's are choosing their best response effort level given the real wage w and unemployment rate U.
• This is because, every point (U,w) that is present on a wage setting curve is can be considered as the best choice of effort an employee exhibits for each w, when the given unemployment rate is U.
• This response function of employees is tangent to their isocost line which makes them choose their best response effort level.