1. Suppose the marginal product of labor in the economy is given by MPN 0.00216,
ID: 1166203 • Letter: 1
Question
1. Suppose the marginal product of labor in the economy is given by MPN 0.00216,000 - N), while the supply of labor is 1000+1000w. That is, N-1000+1000w. (a) Find the equilibrium real wage rate (w) and level of employment (N) (hint: w MPN and labor demand (ND)-labor supply (NS) at a labor market equilibrium) b) What happens to the wage rate (w) and employment (N) if wealth rises, reducing the supply of labor to 500 +1000w? c) What happens to the wage rate (w) and employment (N) if after wealth has risen as in part (b), there is a productivity shock that increases the marginal product of labor to MPN 0.0025(16,000 - N)? e) What happens toExplanation / Answer
Given that MPN = w = 0.002(16000 - N) and labor supply is N = 1000 + 1000w or w = 0.001(N - 1000)
a) At equilibrium demand for labor is equal to its supply. This implies
0.002(16000 - N) = 0.001(N - 1000)
32000 - 2N = N - 1000
N = 33000/3 = 11000 (level of employment)
w = 0.001*10000 = $10 (equilibrium wage)
b) New labor supply is w = 0.001(N - 500)
New equilibrium has
0.002(16000 - N) = 0.001(N - 500)
32000 - 2N = N - 500
N = 32500/3 = 10833 (level of employment)
w = 0.001*10333 = $10.33 (equilibrium wage)
c) New equilibrium has
0.0025(16000 - N) = 0.001(N - 500)
40000 - 2.5N = N - 500
N = 40500/3.5 = 11571.43 (level of employment)
w = 0.001*11071.43 = $11.071 (equilibrium wage)
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