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In the price-setting model, real profit per worker is the portion of a worker's output that is retained by the firm as profit, measured in units of output. It is calculated as the difference between the output per worker (λ) and the real wage (w) paid to the worker.

Real Profit per Worker in the Price-Setting Model

Using the information provided in the case study, calculate the firm's real profit per worker.

Calculating Firm Profit in a Simplified Economy

True or False: In an economy, if firms' average profit share of revenue increases, the economy-wide real profit per worker must also increase.

A firm operating in an economy described by the price-setting model aims to increase its real profit per worker. Based on the components that determine this value, describe two distinct strategies the firm could pursue to achieve this goal. For each strategy, explain the mechanism through which it would lead to higher real profit per worker.

Strategies for Increasing Firm Profitability

The real profit earned by a firm per worker is calculated using the formula $$\sigma\lambda$$. In this expression, $$\sigma$$ represents the firm's profit share (markup), and $$\lambda$$ stands for the output per worker. This formula quantifies the portion of each worker's output that is retained by the firm's owners.

Formula for Real Profit per Worker Using Profit Share

In an economy where the output per worker remains constant, a firm successfully increases its market power, allowing it to claim a larger share of its revenue as profit. What is the direct consequence for the real profit per worker?

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