A Nash Equilibrium In this model, the unemployed are no different from the employed (except for their bad luck). Imagine you are an employer, and one of the unemployed comes to you and promises to work at the same effort level as your current workers but at slightly lower wage. 1. How would you reply? 2. Does your reply help explain why unemployment must exist in a Nash equilibrium?

(b). Explain why a rise in the unemployment rate shifts the best response function but not the wage-setting curve.