What does the ps-curve look like

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Reference no: EM134001014

Assignment:

Consider the standard WS-PS model seen in class. So far, we have assumed that the price setting equation depends only on the competitiveness of the product market. This problem will show that the competitiveness of the labor market may matter as well. Assume that the production function is Y(N) = N a The PS-equation in the standard model is derived from the equation: P = (1 + m) MC where MC is the marginal cost of producing a unit of output, and m is the markup-rate. If the labor market is competitive, MC = W ⇒ W P = 1 1 + m Now suppose that the labor market is not competitive. Use the fact that the marginal cost has now the following expression to derive the new PS-curve MC = W dY/dN (Don't worry about knowing this result from micro!!!)

1. What does the PS-curve look like?

2. Could we have a negative markup? Discuss.

Reference no: EM134001014

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