Suppose the representative firm of the economy has a production function of the form F(K, N) =AKO.5N 0.5 The marginal product of labor is then given by MP N = 0.5AK0.5N –0.5 . The current capital3.stock is K = 40.(a) Holding fixed capital at 40, draw a graph of output as a function of labor. What are some importantfeatures of this graph?(b) If A = 4 what is the Labor Demand Curve, ND(w), as a function of the real wage w?(c) Suppose labor is supplied inelastically with NS(w)= 10. What is the equilibrium wage w, employmentlevel N, and full employment output Y ?(d) Suppose that productivity unexpectedly increases to A = 6. What is the new equilibrium wage w,employment level N, and full employment output Y ?(e) Depict this change graphically. Denote the original labor supply and demand curves by NS and NDrespectively. Denote the new labor demand curve after the productivity shock by ND' . (Does not need to be toscale).

Answered: Suppose the representative firm of the…

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Suppose the representative firm of the economy has a production function of the form F(K, N) =
AKO.5N 0.5 The marginal product of labor is then given by MP N = 0.5AK0.5N –0.5 . The current capital
3.
stock is K = 40.
(a) Holding fixed capital at 40, draw a graph of output as a function of labor. What are some important
features of this graph?
(b) If A = 4 what is the Labor Demand Curve, ND(w), as a function of the real wage w?
(c) Suppose labor is supplied inelastically with NS(w)= 10. What is the equilibrium wage w, employment
level N, and full employment output Y ?
(d) Suppose that productivity unexpectedly increases to A = 6. What is the new equilibrium wage w,
employment level N, and full employment output Y ?
(e) Depict this change graphically. Denote the original labor supply and demand curves by NS and ND
respectively. Denote the new labor demand curve after the productivity shock by ND' . (Does not need to be to
scale).

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