Consider an economy with production function given by Y = AK0.5 10.5 where A is the total factor productivity (TFP), K is the capital stock and L is the labor input. For simplicity assume capital is fixed and equal to 1. Assume A=200. a. Write the firm's problem of choosing labor demand. Derive the demand for labor as a function of the real wage. b. Assume labor supply is inelastic and fixed at L = 100. Find the equilibrium values of the wage and the employment level for this economy. Display graphically the labor supply and the labor demand curves. Carefully label your graph. c. Suppose the economy faces a negative productivity shock and TFP is now A=100. Display graphically the new labor demand function. What are the equilibrium values of employment and the real wage?

Consider an economy with production function given by Y = AK0.5 10.5 where A is the total factor productivity (TFP), K is the capital stock and L is the labor input. For simplicity assume capital is fixed and equal to 1. Assume A=200. a. Write the firm's problem of choosing labor demand. Derive the demand for labor as a function of the real wage. b. Assume labor supply is inelastic and fixed at L = 100. Find the equilibrium values of the wage and the employment level for this economy. Display graphically the labor supply and the labor demand curves. Carefully label your graph. c. Suppose the economy faces a negative productivity shock and TFP is now A=100. Display graphically the new labor demand function. What are the equilibrium values of employment and the real wage?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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