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How does competition influence the price setting curve?
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Competition, along with factors such as labor unions and trade policies, impacts the price setting curve by affecting firms' profit margins and pricing strategies, though it is not directly influenced by the employment level.
How do firms' pricing decisions affect labor market equilibrium?
Firms' pricing decisions influence the real wage and unemployment rate, interacting with the wage setting and price setting curves to establish labor market equilibrium.
How does the unemployment rate affect employment rent and wage setting?
A high unemployment rate increases employment rent, allowing firms to set lower wages. Conversely, a low unemployment rate decreases employment rent, resulting in higher wages.
How do firms determine the optimal price for their products?
Firms determine the optimal price by adding a markup to their production costs, considering the demand elasticity and competition.
What evidence supports the validity of the wage setting curve model in the context of the US labor market?
Empirical data from 1979-2013 in the US shows an upward-sloping wage setting curve, consistent with the model's predictions, with unemployment rates historically peaking around 11%.
What is the primary goal behind firms’ wage setting decisions?
To incentivize workers to provide the profit-maximizing level of effort given incomplete contracts.
What is the real wage, and why is it important for both firms and workers?
Real wage is measured in goods rather than dollars and reflects the true purchasing power of wages. It is important because it determines the living standards for workers and the cost of labor for firms.
What are the key determinants for firms when deciding on the number of workers to employ?
Firms determine the number of workers based on the output required, which depends on the price and demand curve, and the production function.
What factors influence firms' markup over costs in the price setting decision?
Firms' markup over costs is influenced by competition, demand elasticity, production costs, and the wage setting curve.
Explain the concept of employment rent in the labor market model.
Employment rent refers to the additional benefit of being employed over being unemployed, providing motivation for workers to remain employed and avoid job loss.
What is meant by Nash equilibrium in the context of the labor market model?
Nash equilibrium occurs where both workers and firms are optimizing their situations given the best response from the other, resulting in an optimal employment level and real wage.
What role does the price setting curve play in the labor market model?
The price setting curve maximizes firms' profits based on the production capabilities of workers and the real wage, and it intersects with the wage setting curve to determine labor market equilibrium.
Why can't job seekers always convince firms to hire them at lower wages?
Firms are concerned that lower wages might reduce workers’ effort levels, which would not be profit-maximizing, making firms less likely to hire at such wages.
Describe the relationship between nominal wage, unemployment rate, and firms' pricing decisions.
Firms set nominal wages after considering other firms’ prices/wages and the unemployment rate. They also set product prices based on nominal wages and demand, which in turn influences output and the required number of workers.
How do changes in unemployment rate shift the wage setting curve?
An increase in unemployment shifts the wage setting curve left (lower wages), while a decrease in unemployment shifts it right (higher wages).
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