Public indignation and resistance to wage price increases is obviously much less when the increases are on the order of 3% per annum than when the increases are on the order of 3% per month. The simple passage of an additional eleven months' time makes the second 3% boost more acceptable. Thus, the public limit price is raised further by a given wage increase the longer it has been since the previous price increase. Notice, however, that the passage of time does not permit the raising of prices per se, without an accompanying wage increase. Similarly, higher levels of GNP do not, in themselves, provide grounds for raising prices, but they do relax some of the pressure on the industry so that it can raise prices higher for a given wage increase. This is not extended to anticipated levels of GNP, however -- only the current level of GNP affects the public pressure against wage price increases. Finally, since the public requires some restraint on the part of the companies, larger wage increases call for less than proportionately larger price increases (e. g., if a wage increase of 5% allows a price increase of 7%, a wage increase of 10% allows a price increase of something less than 14%).

We assume that average total unit cost in the relevant region of operation is constant with respect to quantity produced (the average cost curve is horizontal, and therefore is identical with the marginal cost curve), and is the same for every firm (and therefore for the industry). The level of this average cost is determined by factor prices, technology, and so forth. As we have noted, however, we are abstracting from changes in all determinants of this level except for changes in the wage rate. The level of average cost (equal to marginal cost) is thus strictly a function of the wage rate.