02 Jun Question 1. (55 points total – 5 points for each of 7 parts – a.
Question
1. (55 points total – 5 points for each of 7 parts – a. through g., 10 points for part h. and the diagram plus 10 for diagram)The production technology of a firm is given in the table below.
Number of workers
Units of output
MPN
0
0
1
48
2
88
3
118
4
144
5
166
6
184
7
196
a. Define the marginal product of labor,, explain how it relates to the production function (with N on horizontal axis and Y on vertical axis) and find the marginal product of labor (MPN) for each level of employment (fill in the third column of table).
b. Assume that the price of a unit of output is $10. Calculate the number of workers that will be hired if the nominal wage rate = $290. Calculate the number of workers the firm will hire if the nominal wage is $250. Calculate the number of workers that the firm will hire if the nominal wage is $200.
Draw a production function and real labor demand curve vertically with the PF on top (like we do in class), labeling point A as the wage / price combo of $290 / $10, point B as the $250 / $10 combo, and point C as the $200 / $10 wage / price combo. Be sure to label your diagram completely.
A correct and completely labeled diagram is worth 10 points
c. What could cause wages to fall like this (name and support 2 reasons)?
d. Why exactly does the firm’s behavior change when the nominal wage changes, all else constant? Make sure you refer to the profit maximizing condition when answering this question. Please discuss in real terms, not nominal terms.
e. Let’s return back to the initial conditions in the beginning of part b, with prices at $10 and nominal wages at $290 (point A). Now we let prices change and fall from $10 to $8, holding nominal wages constant at $290. What could cause such a price change (name at least 2 reasons)? Hint, think of economics 102.
f. Locate this ‘new’ point as point D on your two diagrams. Similar to part d) why exactly does the firm’s behavior change when prices fall from $10 to $8, all else constant? Again, make sure you refer to the profit maximizing condition when answering this question. Please discuss in real terms, not nominal terms.
g. Let’s return to point A, the initial conditions where the nominal wage rate = $290 and the price of a unit of output = $10. Assume that a new technology increases the number of units of output that each worker can produce by 10 units of output (i.e., each worker’s MPN rises by 10). Calculate the number of workers that the firm will hire and the number of units of output that will be produced (fill in the table below).
Number of workers
Units of output
MPN
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