2. Given the effect of the plague on output, show how the marginal product of labor changed and hence how the real wage changed. We know that the marginal product of labor for a Cobb-Douglas production function is MPL = 12 Q/L. The output-to-labor ratio changes from Q/L to Q*/L* = 12 Q/(14 L) = 2Q/L 7 Q/L. Consequently, the marginal product of labor rose from MPL = 12 Q/L to MP*

L = Q/L = 2MPL. The competitive labor demand equation is determined by equating the marginal product of labor to the real wage, MPL = w/p. (We refer to w/p as the real wage because there is only one price, p.) For this equation to hold when the marginal product of labor rose, the real wage of labor, w*/p = MP*

L, had to rise in proportion to MP*

L.