Question

Labor Demand. Refer to Summary 2 (page 74), Figure 3.5 (page 75), and Summary 3 (page 78) in the textbook. Assume the production function is given by Y = A K^1/3N^2/3.

MPN = _______________________.

Write down the labor demand decision rule for a profit-maximizing firm.

is the level of labor input that maximizes the firm’s profit because at that level of labor input ______________ equals ______________.

A positive supply shock (that is, an increase in the value of A) results in a {HIGHER, LOWER} profit-maximizing level of labor input because the MPN curve shifts {DOWN and LEFTWARD, UP and RIGHTWARD}.

Suppose an earthquake damages a large portion of a firm’s capital stock. As a result of the earthquake, the firm’s profit-maximizing level of labor input will go {UP HIGHER, DOWN LOWER} because the MPN curve shifts {DOWN and LEFTWARD, UP and RIGHTWARD}.

Answer 1

Y = AK^1/3N^2/3

(1) MPN = Y / N = A x (K / N)^1/3

(2) Profit is maximized when (MPN x Output price) = Wage rate

P x A x (K / N)^1/3 = W

(3) Profit is maximized at this level because revenue earned by the last unit of labor hired equals the cost of the last worker (wage rate) hired.

(4) A positive supply shock results in a higher profit maximizing level of labor because MPN curve shifts Up and rightward.

(5) As result of earthquake, profit maximizing level of labor will go down lower because MPN curve shifts Down and leftward.