Answer

Solution

1. 1

   Since $Y = N$, marginal cost equals $W/P$ (one unit of labour produces one unit of output). With markup $\mu = 0.2$, the price-setting equation is

2. 2
   $$P = (1+\mu)\, W \;\Longrightarrow\; \frac{W}{P} = \frac{1}{1+\mu} = \frac{1}{1.2} = \frac{5}{6}.$$
3. 3

   The wage-setting equation gives $W/P = 1 - u$. Equating,

4. 4
   $$1 - u_n = \frac{5}{6} \;\Longrightarrow\; u_n = \frac{1}{6} \approx 16.667\%.$$
5. 5

   Natural employment:

6. 6
   $$N_n = L(1-u_n) = 60 \times \tfrac{5}{6} = 50.$$
7. 7

   Hence $Y_n = N_n = 50$.

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