Suppose that the markup of goods prices over marginal cost is 5%, and that the wage-setting equation is

W = P (1 - .4*u + z)

where u is the unemployment rate and z is a variable that reflects the impact of minimum wage policy and unemployment benefits on the wage setting relations.

a) What is the real wage, as determined by the price-setting equation?

b) What is the natural rate of unemployment if z=0.01? Using price-setting relation (PS) and wage-setting (WS) relations curves show the unemployment rate and the real wage you have calculated on a diagram.

c) Suppose there are 150 million people in the labor force. How many people are unemployed and employed at the natural rate of unemployment you have calculated in (b)?

d) Suppose that due to the monopolization the markup of prices over costs increases to 20%, and z decreases to 0.005 due to the changes in unemployment benefits. What is the natural rate of unemployment? Show these results on a diagram with WS and PS curves.

e) Compare the results in (b) and (d). What happens to the natural rate of unemployment? How many more people will become employed or unemployed -- suppose that the number of people in the labor force is still the same, 150 million? Explain the logic behind your answer.