B. Suppose that the firm’s production function is given by f1,2 5 A, a

(with a , 1) and the labor supply curve is given by ws 1,2 5 b,.

a. What is the efficient labor employment level ,* ? (Hint: You should first calculate the marginal revenue product curve.)

b. At what wage w* would this efficient labor supply occur?

c. Define the firm’s profit maximization problem, keeping in mind that the wage the firm must pay depends on ,.

d. Take the first order condition of the profit maximization problem. Can you interpret this in terms of marginal revenue and marginal cost?

e. How much labor ,