1.Profit is equal to revenue minus cost, where revenue equals price times quantity of output,

while cost equals the wage rate times employment (assuming wages are the only cost of production). Assume that, on average, each firm produces 100 units of output a day, employs 90 workers, and pays a wage of $100 a day.

 

            a)   As the price of output rises from $80 to $90, $100, $110, and $120, show how the profitability of firms changes.

            b)   At which of these price levels will firms have an incentive to raise or lower output?

            c)   From these observations, construct an aggregate supply curve.