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Question 1: Consider the DMP model. Low unemployment is a commonly pursued goal of governments. A subsidy, s, given to firms to encourage more hiring is a policy option that can be implemented with the intended goal of increasing employment and reducing the unemployment rate. (16 marks) a) What is the firm’s surplus, consumer/worker surplus and total surplus with the introduction of a subsidy? Where z is total revenue brought in when a worker and firm are matched and together thy produce z, w is the wages paid to the workers and b is benefits/employment insurance received by workers. b) Using Nash Bargaining what is the real wage solution? c) Determine the equation that determines the supply side of the market V(Q) and the demand side of the market, em(1/j,1). d) Solve for equilibrium and show it graphically. e) What is the impact of the subsidy (s) on labour supply (Q) and labour market tightness (j), the real wage (w) and the unemployment rate (u)?
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