Suppose a firm’s hourly marginal product of labour is given by MPN = 0.2(200 − N), where N is the number of labour hours used in production. The amount of labour supplied by workers, NS, is given by NS = 100 + 5w, where w is the real wage. (a) Suppose the current real wage is equal to 20. How much labour will the firm want to hire? How much labour will the workers want to supply? Is there excess supply or excess demand of labour in the economy? Do you expect the real wage to go up or go down in this case? (b) Find the equation of the labour demand and calculate the equilibrium levels of real wage and full-employment. (c) If the government decides to tax the labour income, the equation of labour supply becomes NS = 100 + 5(1 − τ )w. Suppose τ = 40%. Repeat part (b). Compared
Suppose a firm’s hourly marginal product of labour is given by MPN = 0.2(200 − N), where N is the number of labour hours used in production. The amount of labour supplied by workers, NS, is given by NS = 100 + 5w, where w is the real wage.
(a) Suppose the current real wage is equal to 20. How much labour will the firm want to hire? How much labour will the workers want to supply? Is there excess
(b) Find the equation of the labour demand and calculate the equilibrium levels of real wage and full-employment.
(c) If the government decides to tax the labour income, the equation of labour supply becomes NS = 100 + 5(1 − τ )w. Suppose τ = 40%. Repeat part (b). Compared to the results in (b), do the equilibrium levels of real wage and full-employment increase or decrease? Provide an intuitive explanation to your answers.
Step by step
Solved in 2 steps
