Question

Suppose that the firm's markup over cost is initially 15%, and the wage determination equation when Pe=P is W = P(1-u). Discuss the relationship between markup, wage determination, and unemployment rate in this context.

Answer 1

The relationship between markup, wage determination, and the unemployment rate in this context is that a higher markup can lead to higher profits for the firm, but it could also result in a higher unemployment rate due to lower wages.

Step-by-step explanation:

In this context, the relationship between markup, wage determination, and the unemployment rate can be explained as follows:

1. A higher markup means that the price charged by the firm is higher relative to the cost of production. This can result in higher profits for the firm.
2. The wage determination equation, W = P(1-u), represents the relationship between wages and prices. The wage rate (W) is determined by the price level (P) and the unemployment rate (u). As the unemployment rate increases, the wage rate tends to decrease.
3. Therefore, if the firm's markup over cost increases, it may lead to higher profits for the firm, but it could also result in a higher unemployment rate due to lower wages.