1. In a certain economy the production function is Y == A(100N - 0.5N2 ), where Y is output, A is productivity, and N is total hours worked. The marginal product of labor associated with this production function is MPN == A(100 - N). Initially, A= 1.0, but a beneficial productivity shock raises A to 1.1.

a. The supply of labor is NS == 45 + 0.1w, where w is the real wage. Find the equilibrium levels of output, hours worked, and the real wage before and after the productivity shock. Recall (Chapter 3) that the MPN curve is the same as the labor demand curve, with the real wage replacing the MPN.

b. Repeat Part

(a) if the labor supply is NS == 10 + 0.8w.

c. Some studies show that the real wage is only slightly procyclical. Assume for the sake of argument that this finding is correct. Would a calibrated RBC model fit the facts better if the labor supply is relatively insensitive to the real wage, or if it is relatively sensitive? Justify your answer diagramma tically and relate it to your answers to Parts

(a) and (b).