Q1: We use PF to compute profits as revenue minus cost, i.e., = R - C

Where Revenue = PX=P(PP )^(-) (MP )

And Cost = w.N=w . N. P

A&Y Near Rational Model Long-run Equilibrium We use PF to compute profits as revenue minus cost, i.e., I = R - C Where Revenue = PX = P(/) "("/,) And Cost = w. N = w .N.P From PF X = (eN)"= N= e-#1 X 1/, OrN = (e(w)) 1 (P/,) "/z (w/)'s By substitution Cost = (e(wj) 1 (P/,) (w/)'s.P . Therefore [ = R- C = P(/,) "("/,) - (e(w))-1 (P/,)(M/, ).F (4) In equilibrium the firm chooses its own Price and Wage that maximize profit on the assumption that average price is unaffected by its decision. If price in the initial period is P. and money supply M., with P =P yield equilibrium price as: (derived through first order condition;) Fo = K Mo where k = a/(1-a) only-Dje (an) Here real wage is chosen at the optimizing level of w* where ,,w = 1 With w = w*, the demand for labor is No = K i/e(w :) (Please derive the values of P, and No as assignment) When N> > Na = there is involuntary unemployment