In the DMP model
A) the firm threatens the worker with separation and takes all the surplus from the match.
B) the firm's surplus from a match is equal to a constant fraction of total surplus.
C) the firm earns zero profits in a match.
D) when a match occurs, the firm is indifferent between continuing with the match and letting the worker go.

Question

Quizplus · Accepted Answer

In the DMP model, the firm's surplus from a match is equal to a constant fraction of total surplus. Therefore, option B is correct. The other options are not accurate representations of the DMP model. In the model, the firm has bargaining power, but it does not threaten the worker with separation. The firm can earn profits in a match if the constant fraction is less than one, but it is not necessarily zero. Finally, the firm is not indifferent between continuing with the match and letting the worker go since it incurs search and hiring costs to find a replacement worker.

In the DMP Model