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To build a comprehensive understanding of the economy-wide price-setting real wage, the analytical approach starts at the microeconomic level. The model first considers the price-setting decisions of an individual firm, which then serves as a basis for understanding the aggregate PS curve.

Analyzing the Price-Setting Curve from a Single Firm's Perspective

A single, profit-maximizing firm operates in a market where new technology significantly lowers the barriers to entry, leading to an increase in the number of competing companies. Assuming the firm's labor costs per unit of output remain unchanged, how will this intensified competition most likely affect the firm's pricing decision and the real wage implied by that price?

A company that manufactures widgets successfully implements a new technology that allows each worker to produce 20% more widgets per hour. The company continues to pay its workers the same hourly monetary wage, and the level of competition it faces from other widget-makers remains unchanged. Explain how this increase in worker output will likely affect the company's price per widget and the real purchasing power of its workers' wages.

Firm Pricing and Productivity Changes

Analyze the following scenario and explain how the change in market conditions will likely affect the firm's price, its profit margin (markup), and the real wage implied by its pricing decision. Justify your reasoning.

Firm Pricing Strategy Under Changing Market Conditions

Imagine a single, profit-maximizing firm that produces a unique type of smartphone. Initially, this firm is the only producer in the market. Later, several new companies enter the market, offering similar smartphones. Analyze how this shift from a monopoly to a more competitive market structure would likely influence the original firm's price-setting strategy. In your analysis, discuss the expected changes to the firm's price, its profit margin per unit, and the real wage it can afford to pay its workers, assuming labor productivity remains constant. Justify your reasoning for each component.

Firm's Pricing Strategy and Market Power

A single firm determines its product price by setting a markup over its production costs. Match each change in the firm's operating environment to its most likely immediate impact on the firm's pricing decision and the resulting real wage share.

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