Assume that the aggregate production function is represented by Y = AN. Which of the following represents the price- setting relation for this economy?
A) W/P.
B) (1 + m)W.
C) W/A.
D) (1 + m)(W/A).
E) (1 + m)(A/W).

Question

Quizplus · Accepted Answer

The price-setting relation in this economy is represented by the markup pricing equation, which is (1 + m)(W/A), where W is the wage rate and m is the markup. This equation implies that the price level depends on the markup and the real wage rate (i.e. the wage rate adjusted for productivity). Choice D is the only option that represents this equation.

Assume That the Aggregate Production Function Is Represented by Y