Question

Suppose that the firms' markup over cost is 10% and that the wage determination equation when...

Suppose that the firms' markup over cost is 10% and that the wage determination equation when Pe=P is

W = P(1-u)

where u = unemployment rate (assume for simplicity, that the catch-all variable z does not enter wage setting).

What is the natural rate of unemployment?

(please answer in the form 0.xxxx (which 4 digital places), e.g. 0.1234 representing 12.34%)

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Answer #1

Mark up cost = 10%

Wage determination equation when Pe = P

W = P(1-u)

Price setting equation,

Here value of

Wage setting equation, W = P(1 -u)

Natural rate of unemployment = 9.09%

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