Draw a new graph of labor market equilibrium and label values for the initial real wage and employment.
a. Draw a graph of the firm’s marginal product of labor, assume a fixed value for the real wage, and describe how the firm decides how much labor to hire. How is the marginal product of labor related to labor demand?
b. How does an increase in total factor productivity affect labor demand? Draw this on your original graph of labor market equilibrium and label new equilibrium points.
c. Write the expression for potential output. How does the increase in total factor productivity affect potential output? Explain.