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Problem Two Shortrun Analysis of Labour Demand Suppose that a rm's production function is Q = VK * N where K is capital and N
Problem Two Shortrun Analysis of Labour Demand Suppose that a rm's production function is Q = VK * N where K is capital and N is units of labour in thousands. Currently, K = 1 and T = $5 per unit. The market labour supply is given by W = 4N3. Assume that the output is sold in a perfectly competitive market at a per-unit price of $2. (Round up your answers to two decimals.) Assume that the rm's wage is determined in a perfectly competitive labour market. a) Write down the marginal product of labour and derive the short run labour demand. b) Calculate the equilibrium wage and employment levels. (2) Suppose that the wage rate decreases. Without any calculation, briey explain the role of substitution and scale effects in the rm's adjustment of labour. (Hint: T his is short run where capital isxed.)
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