Q.1 Consider the DMP model. Low unemployment is a commonly pursued goal of governments. A subsidy, s, given to firms to encourage more hiring is a policy option that can be implemented with the intended goal of increasing employment and reducing the unemployment rate. (17 marks)

a) What is the firm's surplus, consumer/worker surplus and total surplus with the introduction of a subsidy? (3 marks)

b) Using Nash Bargaining what is the real wage solution? (2 marks)