The marginal product of labor (measured in units of output) of a firm is given by MPN = A(2000 - N)
where A measures productivity and N is the number of labor hours used in production. Suppose the price of output is $6 per unit and A = 0.002.
(a) What will be the demand for labor if the nominal wage is $18?
(b) What will be the demand for labor if the nominal wage rises to $21?
(a) The real wage = $18/$6 = 3. Setting the real wage equal to the marginal product of labor gives 3 = 0.002(2000 - N), so 0.002N = 1, so N = 500.
(b) The real wage = $21/$6 = 3.5. Setting the real wage equal to the marginal product of labor gives 3.5 = 0.002(2000 - N), so 0.002N = 0.5, so N = 250.
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