Consider an economy with the following Cobb-Douglas production function: Y = K1/3L2/3 The economy has 1000 units of capital and a labor force of 1000 workers.
A. Derive the equation describing labor demand in this economy as a function of the real wage, W/P , and the capital stock.
B. If the real wage can adjust to equilibrate labor supply and labor demand what is the equilibrium real wage? In this equilibrium what are employment, output and the total amount earned by workers?
C. Suppose congress sets a minimum real wage at 1. What are the anticipated e?ects of this law? Will congress succeed in its goal of helping the working class?