22 Jul WHAT IS THE REAL WAGE RATE PAID BY THIS FIRM?
Consider a perfectly competitive profit-maximizing firm facing the following marginal product of la Show more Consider a perfectly competitive profit-maximizing firm facing the following marginal product of labor function and prices: ? MPL = A(K/L)1/2 ? MPK = A(L/K)1/2 ? W = 20 ? R = 10 ? P = 2 ? K = 4 a. Does this firms production function exhibit diminishing returns to labor employment? Are labor and capital complements for this firm? Explain. b. What is the real wage rate paid by this firm? c. If total factor productivity (A) is 100 how much labor (L) would this firm want to employ? d. If the price of output (P) falls from $2/unit to $1/unit what will the new real wage rate be? All else equal how much labor would the firm want to employ at that wage rate? e. Assuming that total factor productivity is 100 graph this firms labor demand function (quantity of labor demanded graphed against the real wage paid for labor) for values of the real wage between 10 and 25. Be sure to plot at least 3 distinct points. f. Now suppose that total factor productivity rises to 125. Re-graph the firms labor demand function for values of the real wage between 10 and 25. Show less
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