Question

ECON20521 Macroeconomics Analysis 3 Tutorial 4 1. Explain the shape of the representative firm's demand for labour. 2. What are the effecets of a temporary increase in government purchases on the real interest rate, aggregate output, employment, the real wage, consumption and invest- ment? 3. Determine how the following affects the slope of the out put demand curve, and explain your results: (a) The MPC increases. (b) The intertemporal substitution effect of the real iuterest rate on current con-

help with question 1 please

Answer 1

(1)

Firm's demand for labor is given by the Marginal Revenue Product (MRP) curve, where MRP is the product of Marginal Product (MP) of labor and output price (P).

As more of labor gets added to production, output starts increasing at a decreasing rate, making MP decrease. This is the law of diminishing marginal product. Since MPL curve is downward sloping, when output price is constant, the MRP curve also will slope downward. Therefore, firm's labor demand curve will be downward sloping.

Intuitively, the higher (lower) the wage rate, the more (less) expensive labor gets, and the firm decreases (increases) the quantity of labor used in production (assuming capital and labor are substitutable even if imperfectly). Therefore labor demand curve is downward sloping.