# Rate of unemployment, real wage, WS and PS relation

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Suppose that the firm's markup over cost is 3%, and the wage-setting equation is W = P(1-u+z), where u is the unemployment rate and z is equal to 0.05.

(a) What is the real wage as determined by the price-setting equation. What is the natural rate of unemployment?

(b) Using the WS and PS relation, graphically illustrate the effect of an increase in markup on the equilibrium real wage and the natural rate of unemployment.

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##### Solution Summary

The solution gives detailed steps on computing real wage and rate of unemployment. All formula, graphs and calculations are shown and explained.

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