a) An economy's aggregate production function is given by Y = AKN - N 2 . The marginal product of labor for this production function is MPN = AK - 2N. Assume that A = 8 and K = 9. Suppose that the labor supply function for this economy is given by NS = 3 + w. Find the equilibrium real wage rate, the full employment level of employment, and the full-employment level of output for this economy. Draw a production function and labor market diagram vertically as we did in class and label this initial equilibrium point as point A.

(b) Suppose that the corporate tax rate goes up and this results in firms investing in less capital so that capital (K) falls to 8 (from 9). In addition, the open borders down south increase labor supply so that labor supply is now: N S = 5 + w Find the equilibrium real wage rate, the full employment level of employment, and the full-employment level of output for this economy and label on your diagrams as point B.

(c) (10 points) Explain exactly why the profit maximizing level of labor has changed given the increase in total factor productivity. Again be very specific with your answer as in using numbers. Begin your answer with: At the same level of labor input N* = (what it was at point A), the firm is no longer .....

(d) Are workers better off or worse off due to the decrease in the capital stock (K). What has happened to the government's income tax revenue and why? Corporate tax revenue?