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F(K,N)=AK0.5N0.5 The marginal product of labor is then given by MPN=0.5AK0.5N0.5 The current capital stock is K=40. (a) Holding fixed capital at 40, draw a
F(K,N)=AK0.5N0.5 The marginal product of labor is then given by MPN=0.5AK0.5N0.5 The current capital stock is K=40. (a) Holding fixed capital at 40, draw a graph of output as a function of labor. What are some important features of this graph? (b) If A=4 what is the Labor Demand Curve, ND(w), as a function of the real wage w ? (c) Suppose labor is supplied inelastically with NS(w)=10 What is the equilibrium wage w, employment level N, and full employment output Y ? (d) Suppose that productivity unexpectedly increases to A=6. What is the new equilibrium wage w, employment level N, and full employment output Y ? (e) Depict this change graphically. Denote the original labor supply and demand curves by NS and ND respectively. Denote the new labor demand curve after the productivity shock by ND. (Does not need to be to scale)
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