1. An economy's firms produce goods along the Cobb-Douglas production function:

Y = A * K^0.5 * L^0.5

For it, the marginal product of a worker is

MPL = 0.5 * A * K^0.5 / L^0.5, in which K = 16

Workers bargain for wage by looking at the rate of unemployment and inflationary surpise:

w = 2 * EP/P *L^0.5

K = 16.

The economy is in equilibrium at EP=P=1 and A=9. In it, the number of workers is L=9 and the wage is =6.

Now, thanks to temporarily abundant oil, the productivity changed from A=9 to A=16.

Find the new equilibrium number of workers.

2. Find the new equilibrium wage at A=16.

3. Graph the change in the labor market equilibrium. Mark the before and after equilibria with E0 and E1. Label axes and curves, map relevant values onto axes.