Productivity Gains and Real Wage. Let us consider a closed economy with one final good whose price is normalized to one. The supply of labor by the representative household, NS, is fixed at Ñ, i.e., NS N. Labor supply (LS henceforth) is thus a vertical line in the (N,w)-space where w is the hourly real wage. The representative firm produces an amount Y of the the final good by using labor, N: Y = A ln N where A is labor productivity. - (a) Provide an explanation to the insensitivity of labor supply to real wage in- creases (hint: make use of the substitution and income effects). (b) Derive labor demand (LD henceforth). Derive the equilibrium real wage, w*. (c) Show graphically the effects of a rise in labor efficiency, A. How does the equilibrium real wage vary?

Productivity Gains and Real Wage. Let us consider a closed economy with one final good whose price is normalized to one. The supply of labor by the representative household, NS, is fixed at Ñ, i.e., NS N. Labor supply (LS henceforth) is thus a vertical line in the (N,w)-space where w is the hourly real wage. The representative firm produces an amount Y of the the final good by using labor, N: Y = A ln N where A is labor productivity. - (a) Provide an explanation to the insensitivity of labor supply to real wage in- creases (hint: make use of the substitution and income effects). (b) Derive labor demand (LD henceforth). Derive the equilibrium real wage, w*. (c) Show graphically the effects of a rise in labor efficiency, A. How does the equilibrium real wage vary?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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