Find the equilibrium levels of the real wage, employment and output

. (50 points total – 5 for each of part and 15 points for completely labeled diagram.)

The following equations characterize a country’s closed economy.

Production function: Y = A·K·N – N2/2

Marginal product of labor: MPN = A·K – N.

where the initial values of A = 8 and K = 10.

The initial labor supply curve is given as: NS = 20 + 9w.

a) (10 points) Find the equilibrium levels of the real wage, employment and output (show work).

In the space below, draw two diagrams vertically with the labor market on the bottom graph and the production function on the top graph. Be sure to label everything including these initial equilibrium points as point A.

(15 points for correct and completely labeled diagrams)

We now have numerous changes to our economic conditions (all is not constant). Think of all these changes happening together, that is, we go from one state of economic affairs to a different state of economic affairs. Below are the changes.

· The labor supply changes and is now: NS = 24 + 9w .

· K goes down from 10 to 8.

b) (5 points) What could cause such a change in labor supply? Please give two specific and well supported reasons. Be sure to explain your answer.

c) (10 points) Solve for the new equilibrium values of the real wage, employment, and output and label as point B.

d)(10 points) Explain why exactly why the firm changes their behavior… again… at the same level of labor input ……….. Use specific numbers!


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