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I'm studying Gali's work with the paper(or book?) which is "Jordi Gali, Monetary policy inflation and the business cycle_An introduction to the new keynesian framework(2015)" and wonder one thing about setting marginal cost of a firm.

On the paper chapter 3 THE BASIC KEYNESIAN MODEL, with respect to the behavioral principal of firms, he suggests an individual firm’s marginal cost in terms of the economy’s average real marginal cost as enter image description here

but I cannnot understand why the first equality works since I have been teached that w/p=mpn in general.

Anybody who let me know the solution idea to solve it??

thanks in advance.

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  • $\begingroup$ Please type equations using MathJax. $\endgroup$
    – Herr K.
    Feb 1, 2021 at 15:22
  • $\begingroup$ Please define what the variables are. $\endgroup$
    – BB King
    Feb 5, 2021 at 1:39

1 Answer 1

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The equation is in logs. Thus, $$MC_{t}=\frac{W_{t}/P_{t}}{MPN_{t}}$$ $$mc_{t} = w_{t}-p_{t}-mpn_{t}$$ And after that use $$MPN_{t} = (1-\alpha)\frac{Y_{t}}{N_{t}} = (1-\alpha)A_{t}N_{t}^{-\alpha}$$ also using $$N_{t} = \left(\frac{Y_{t}}{A_{t}}\right)^{\frac{1}{1-\alpha}}$$ Then you obtain the expression above.

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