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In an economy, the firms profit-maximize by comparing the MPL to the wage: 0.5.A. √K/√L = w And workers negotiate their wage raises by looking at the # of jobs and the expected inflation: EP W = √L P The productivity is A=3.7 and there is K = 36 of capital. Workers expect the price level EP = 2. (a) Express the labor market equilibrium condition for P as a function of L. That is, isolate P and have everything else on the right-hand side. Keep L but plug in and simplify everything else. (b) Use the production function Y = A√√ī to substitute labor L in the labor market and obtain the AS curve as P(Y). That is, have √P isolated and everything else, including Y, on the right- hand side

In an economy, the firms profit-maximize by comparing the MPL to the wage: 0.5.A. √K/√L = w And workers negotiate their wage raises by looking at the # of jobs and the expected inflation: EP W = √L P The productivity is A=3.7 and there is K = 36 of capital. Workers expect the price level EP = 2. (a) Express the labor market equilibrium condition for P as a function of L. That is, isolate P and have everything else on the right-hand side. Keep L but plug in and simplify everything else. (b) Use the production function Y = A√√ī to substitute labor L in the labor market and obtain the AS curve as P(Y). That is, have √P isolated and everything else, including Y, on the right- hand side

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question 5. The short and medium run: Aggregate supply In an economy, the firms profit-maximize by comparing the MPL to the wage: 0.5 A √K/√L = w And workers negotiate their wage raises by looking at the # of jobs and the expected inflation: EP √L P The productivity is A=3.7 and there is K = 36 of capital. Workers expect the price level EP = 2. (a) Express the labor market equilibrium condition for P as a function of L. That is, isolate P and have everything else on the right-hand side. Keep L but plug in and simplify everything else. W = (b) Use the production function Y = A√K√L to substitute labor L in the labor market and obtain the AS curve as P(Y). That is, have √P isolated and everything else, including Y, on the right- hand side (c) Without shocks and policies, the economy is in the long-term equilibrium at Yo=74, Po=2. A fiscal expansion moves the expenditure to Y₁=80.4 in the very short-run and to Y₂=79 in the short run. Remember the distinction between very short and short. With that, find: the very short run output the very short run price level the short run price level (d) Show your three results from (c) in an AS/AD graph. Answers Provided: 5. (a) P = 0.18 * L (b) √P √0. 18. Y 3.7√36 (c) 74, 2, 2.28
Transcribed Image Text:Question 5. The short and medium run: Aggregate supply In an economy, the firms profit-maximize by comparing the MPL to the wage: 0.5 A √K/√L = w And workers negotiate their wage raises by looking at the # of jobs and the expected inflation: EP √L P The productivity is A=3.7 and there is K = 36 of capital. Workers expect the price level EP = 2. (a) Express the labor market equilibrium condition for P as a function of L. That is, isolate P and have everything else on the right-hand side. Keep L but plug in and simplify everything else. W = (b) Use the production function Y = A√K√L to substitute labor L in the labor market and obtain the AS curve as P(Y). That is, have √P isolated and everything else, including Y, on the right- hand side (c) Without shocks and policies, the economy is in the long-term equilibrium at Yo=74, Po=2. A fiscal expansion moves the expenditure to Y₁=80.4 in the very short-run and to Y₂=79 in the short run. Remember the distinction between very short and short. With that, find: the very short run output the very short run price level the short run price level (d) Show your three results from (c) in an AS/AD graph. Answers Provided: 5. (a) P = 0.18 * L (b) √P √0. 18. Y 3.7√36 (c) 74, 2, 2.28
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