Assume that an economy's production function is Y=1,000L1/2,so that when the marginal product of capital is equated to the real wage the labor demand curve is L = 250,000(P/W)2. The labor 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. If the actual price level turns out to be 20, what will the actual real wage be? b. According to the labor demand curve, how much labor 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 labor given in part b is actually hired, how much will production be?

Assume that an economy's production function is Y=1,000L1/2,so that when the marginal product of capital is equated to the real wage the labor demand curve is L = 250,000(P/W)2. The labor 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. If the actual price level turns out to be 20, what will the actual real wage be? b. According to the labor demand curve, how much labor 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 labor given in part b is actually hired, how much will production be?

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter8: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 4WNG

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