Part 2. Problem #12-4 (8 th or 7 th edition) or #12-3 (5th or 6th edition)

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12-3. Suppose the marginal revenue from search is

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MR = 50 – 1.5w,

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where w is the wage offer at hand. The marginal cost of search is

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MC = 5 + w.

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• Why is the marginal revenue from search a negative function of the wage offer at hand?

• Can you give an economic interpretation of the intercept in the marginal cost equation; in other words, what does it mean to say that the intercept equals $5? Similarly, what does it mean to say that the slope in the marginal cost equation equals one dollar?

• What is the worker’s asking wage? Will a worker accept a job offer of $15?

• Suppose UI benefits are reduced, causing the marginal cost of search to increase to MC = 20 + w. What is the new asking wage? Will the worker accept a job offer of $15?