Question 2 Consider the labor market in the following situation (Note: All the parameters are positive). (1) Wage Determination: W = PeF(u, z), F(u, z) = Boz - B₁u (2) Price Determination: P = (1 + μ)MC (3) Aggregate Production Function: Y = AN 1 (4) L= the number of people in the labor force (5) N-the number of the employed in L, U = L – N (6) Unemployment rate: u = - ==1-2 (7) MC (Marginal Cost of Production) measures how much additional product costs. (a) In this economy, how much is MC? (b) Derive the short-run AS relation in this economy while assuming price expectation (Pe) is exogenously given. (c) Find the natural rate of unemployment and the natural level of aggregate output when A=1. (d) How will the natural rate of unemployment and the natural level of aggregate output change if A drops to 1/2 due to a certain natural disaster?
