Point B in Figures 9.10 and 9.11 on the pricesetting curve shows the outcome of protmaximizing pricesetting behaviour of rms for the economy as a Whole. Labour supply At A, real wage too high and markup too low; rms raise price; and given demand, output falls ----------------------------------------------------------------------------- : Average product A 1 1/013. ; of labour,)\\ Price-setting curve Average product of labour, 7i: Real wage, W/P E Ea Employment, N (whole economy) Point A Point A is above the price-setting curve, which means that the real wage is higher than is consistent with a firm's profit maximizing markup. lfthe real wage is too high, it means the markup is too low. Figure 9.11 The pricesetting curve. Isoprot curves Wage Demand curve {given economywide demand) q'k Units of output, q (and hours of labour, n) FULLSCREEN Maximum prots The maximum profits occur at point B where the firm's demand curve is tangent to an isoprofit curve. Figure 9.9 The firm's profitmaximizing choice of price, quantity, and employment. EXERCISE 9.3 THE PRICE-SETTING CURVE LINK In your own words and using a diagram like Figure 9.9, explain why prices would fall and employment would increase if the economy were at point C in Figure 9.11 (the opposite of what happens at point A)