I'm currently doing multiple choice questions and cant figure this question out. I keep getting 1/9 as an answer when its meant to be 10%. Any help would be great. Thanks

Suppose that the mark-up of prices over nominal wages is 11. 1ฬ‡% (i.e. 1 9โ„ ), and thatthe wage-setting equation is ๐‘Š๐‘ƒ = ๐น(๐‘ข, ๐‘ง) = ๐‘ง(1 โˆ’ ๐‘ข), where u is the unemploymentrate. If ๐‘ง = 1 what is the equilibrium level of unemployment?


1 Answer 1


Equilibrium should be found equaling price and wage setting equations together. In your case that would be:

$$\frac{1}{1+\mu} = z(1-u)$$

where $\mu$ is markup, and filling in the parameters you will find that $u$ should be:

$$\frac{1}{1+0.11} = 1(1-u)$$

$$u\approx 0.099$$

$0.099$ can be rounded to 10%, but it is not 1/9 which would be close to 11%.


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