Monster Conglomerate Inc (MCI) manufactures paper clips for the Pentagon. At its current capital stock it produces paper clips with the production function: y = 8.5L-0.5L2 where L is the number of workers employed.
A) With the nominal wage fixed at $38, the price of paper clips rises to $10 from $5.
What happens to MC Inc.’s labor demand and production?
B) With the nominal wage fixed at $38 and the price of paper clips fixed at $5, the introduction of a new production technology doubles the number of paper clips that can be produced by any given number of workers. What happens to the quantity of labor demanded and to production?
C) What is the relationship between your answers to (A) and (B) ?