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            Suppose the mark-up is 12% and the wage-setting equation is W = P (1 –...

            Suppose the mark-up is 12% and the wage-setting equation is W = P (1 – u), where u is the unemployment rate.

            i) What is the real wage, as determined by the price-setting relationship?

            ii) Define the natural rate of unemployment in this context and calculate it for this example.

iii) Suppose the markup of prices over costs decreases to 6%. Compute the natural rate of unemployment now and compare it to the one in ii)? If you find it to be different, explain the economic logic behind the change (increase or decrease).

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