Assignment:
Consider a perfectly competitive, profit-maximizing firm facing the following marginal product of labor function and prices: MPL = 0.5A(K/L)1/2 W = 40 R = 60 P = 10
a. What is the real wage rate paid by this firm?
b. If total factor productivity (A) is 50 and the firm is employing 16 units of capital (K = 16), what will the firm's quantity of labor demanded (Ld ) be?
c. If the nominal wage (W) rises from $40 to $200, what will the new real wage rate be? All else equal, what would the firm's quantity of labor demanded (Ld ) be at that new wage rate?
d. Assuming that A = 50 and K = 16, graph the firm's labor demand function (quantity of labor demanded graphed against the real wage paid for labor) for values of the real wage between 4 and 20. Be sure to plot at least 3 distinct points.
e. Now suppose that the firm increases its capital employment to 36 units (K = 36). Graph the firm's new labor demand function for values of the real wage between 4 and 20. Again, be sure to plot at least 3 distinct points.