Assume that an economy's production function is Y = 1,000L1/2, so when the marginal product

of capital is equated to the real wage the labour demand curve is L = 250,000(P/W)2. The labour

supply curve is L = 31,250(W/P). The real wage that solves these equations is W/P = 2. Assume

that the expected price level is 10, so that a nominal wage contract setting the wage at 20 is

agreed to, making the expected real wage 2. If the price level turns out to be 10, 62,500 workers

will be hired and output will be 250,000.

a. If the actual price level turns out to be 20, what will the actual real wage be?

b. According to the labour demand curve, how much labour will be demanded if

the actual real wage is at the level given in part a?

c. According to the production function, if the amount of labour given in part b is

actually hired, how much will production be?