Suppose a firm's hourly marginal product of labor is given by MPN = A (200 - N)
(a) If A = 0.2 and the real wage rate is $10 per hour, how much labor will the firm want to hire?
(b) Suppose the real wage rate rises to $20 per hour. How much labor will the firm want to hire?
(c) With the real wage rate at $10 per hour, how much labor will the firm want to hire if A rises to 0.5?
(a) The firm will hire labor such that w = MPN, or 10 = 0.2(200 - N), so N = 150.
(b) Now 20 = 0.2(200 - N), so N = 100. The firm's labor demand falls when the wage rate rises.
(c) Now 10 = 0.5(200 - N), so N = 180. The increase in productivity increases labor demand.
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