1) Suppose the marginal product of labor in the economy is given by MPN = 0.005(18,000...
1) Suppose the marginal product of labor in the economy is given by MPN = 0.005(18,000 - .005N), while the supply of labor is 2000 + 1000w. (a) Find the market-clearing real wage rate and level of employment. (b) What happens to the wage rate and employment if wealth rises, reducing the supply of labor to 200 + 1000w?
2) Find the interest rate that clears the goods market of an economy that has has full-employment output of 5000. Government purchases are 1000. Desired consumption and desired investment are given by Cd = 3000 - 2000r + 0.10Y I d = 1000 - 4000r where Y is output and r is the expected real interest rate. Given your clearing real interest rate what is the amount of saving, investment, and consumption in equilibrium.
Homework Answers
Solution
(a) Market Clearing real wage rate and level of employment :-
The market-clearing real wage rate equates the demand and supply of labor.
Setting w = MPN
w = 90 - 0.005(2000+1000w)
w = 90-10 - 5w
w = 80-5w
6w = 80
w = 13.33
The wage rate will be 13.33
Putting this in labor supply equation,
N=2000 + 1000 × 13.33
N=15,330
The employment will be 15,330
(b)
Setting w = MPN = 0.005(18,000 - .005N)
w = 90 -0.005(200 + 1000w)
w = 90-1 - 5w
6w = 89
w = 14.83
The wage rate increased to 14.83
Putting this in labor supply,
N = 200 + 1000 × 14.83 = 15030
The employment will be reduced to 15030
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