Continuing with Question 6 above, we will now show the output effect.

The demand curve for widgets is: QD = 100 – 2 × P. Assume all firms are identical to that described in problem 6 and that the industry is competitive.

a. When wages are $2 and capital costs $3 per unit, what is the long-run supply price in this industry? What is the long-run level of output? What is the long-run level of employment?

b. If wages rise to $4 per unit, what is the long-run supply price for output in this industry? What is the long-run level of employment?
What are the output and the substitution effects of the higher wage?