Question A.1: Equilibrium in the Labor Market (30 Marks) (a) (7 Marks) First we are asked to find the labor demand. In order to do that, we need to compute the marginal product of labor and equate it to the real wage: MPN = w. First, notice that we can collect terms in the production function: Y = K (AN) + LY (AN) = (K + L^) (AN) Then we compute the derivative of the production function with respect to labor and impose the opti- mality condition: B-1 MPN = A (K + LY) (AN)1 = w Finally, solving the equation for Nd (with the wage on the right hand side) gives the labor demand: Nd (w) = 1 ABA (Ka+ LY) B-1 = 1 [BA (KL)] A