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2. Firms in Pretendville produce output using capital and labour. They are endowed with a fixed quantity of capital, which they are unable to vary.
2. Firms in Pretendville produce output using capital and labour. They are endowed with a fixed quantity of capital, which they are unable to vary. The marginal revenue product of labour is equal to: MRPy = 360-12/, where / is the quantity of labour employed. There are 240 identical firms in Pretendville, and they hire labour in a competitive market. Workers in Pretendville supply 7,000 units of labour inelastically. (a) [5 pts] Derive the market demand function for labour. (b) [5 pts] Derive the equilibrium wage and level of employment in Pretendville. Illus- trate your answer with a carefully labelled graph.(c) [5 pts] The government of Pretendville decides to offer a payroll subsidy to firms. Specifically, the government offers to pay firms $2 per unit of labour hired. What will be the equilibrium wage and level of employment under the payroll subsidy? Illustrate your answer with a carefully labelled graph. (d) [5 pts] A Pretendville politician suggests that the payroll subsidy is too expensive, and that an easier way to raise workers' wages is to impose a minimum wage equal to the equilibrium wage from part (c). What would be the wage and level of employ- ment under this new policy? Illustrate your answer with a carefully labelled graph
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