An economy's aggregate production function is given by Y = AKN - N2. The marginal product of labor for this production function is MPN = AK - 2N.

 

a) Assume that A = 3 and K = 16. Suppose that the labor supply function for this economy is given by NS = 4 + w. Find the equilibrium real wage rate, the full employment level of employment, and the full-employment level of output for this economy. Round everything to 2 decimal places. Note: it is OK to have fractions of workers or fraction of output. w = N = Y =

b) Draw a production function and labor demand curve vertically as we did in the videos (many times) and label these initial equilibrium points as A.

c) Suppose that a new innovation leads to a decrease in total factor productivity so that A decreases to 2.5 (yes, innovations can lead to worker productivity falling... think social media). Everything else remains as in part a). 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. Round everything to 2 decimal places. Note: it is OK to have fractions of workers or fraction of output. w = N = Y =

d) List and explain two reasons as to why A could have changed like this.

e) Let's go back to our initial conditions (point A). Instead of a change to A impacting the economy, assume that K is now equal to 18. Everything else is as it was in part a). (In particular, A = 3.) Find the new levels of the equilibrium real wage rate, the full employment level of employment, and the full-employment level of output for this economy and label (on both diagrams) as point C. Round everything to 2 decimal places. Note: it is OK to have fractions of workers or fraction of output. w = N = Y =

f) List and explain two reasons as to why K could have changed like this.

g) Instead of a change to A or a change in K impacting the economy (we are back to point A), suppose that there is a change in the supply of labor such that we have NS = 3 + w (All else remains as in part a)). (In particular, A = 3 and K = 16.) Find the new levels of 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 D. Round everything to 2 decimal places. Note: it is OK to have fractions of workers or fraction of output. w = N = Y =

h) Give two well supported answers as to why Ns might have changed as it did in part g) above.