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I have no idea how to do these questions. I can't quite understand how the economy described in situation VII is even relevant. I'm probably missing something trivial, so any help or even a nudge in the right direction will be appreciated. Thanks! |
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hi
i have same doubts ![]() were u able to do q 20 - 23 ?? if yes , please help me . |
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My solutions are messy and could be completely incorrect, so proceed with caution.
Q. 20 Markets will clear when D(w) = S(w) or at w = 1/2. The corresponding employment level is equal to 1/2. So, the aggregate supply is f(1/2). Q. 21 The nominal wage rate W minimises |D(W/P) — S(W/P)|. Or, it minimises |(1-(W/P)) - (W/P)| = |1 -(2W/P)|. The minimum value of this expression is 0, which is achieved when 2W/P = 1 or W = P/2. However, we are given the constraint W ≥ W0. So, if P/2 ≥ W0, the minimum value is obtained at W = P/2. If P/2 < W0, the constrained minimum value is obtained at W = W0. Note that we are choosing max {W0, P/2}, which is the required answer. Q. 22 The nominal wage is given by max {W0, P/2}. If W0 ≥ P/2, then W = W0 and w = W0/P. Labour demand is given by D(w) = 1 - w. So, employment level is 1 - W0/P. If P/2 ≥ W0, then W = P/2, and w= 1/2. Hence, labour demand, and employment level is also 1/2. In this case, we are choosing from min {1/2, 1 - W0/P}. Q. 23 Now, 1/2 < 1- W0/P. From the previous answer, we can deduce that the employment level is 1/2. So, the aggregate supply is f(1/2). In case you're wondering, yes, I'm working on my verbosity. |
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... [show rest of quote]
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Because at w = 1/2, demand and supply of labour is 1/2?
D(w) = 1 - w and S(w) = w. I substituted the market clearing wage in the equations. I hope I'm not confusing you further ![]() |
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ok ya sorry ...
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There's a much better explanation for 21 here.
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