Question

A firm has a production function Y = (K^0.3)*(N^0.7). Given this production function, the marginal product of labor is given by MP_N =0.7*(K^0.3)*(N^-0.3). Suppose that the firm uses 1 unit of capital for production, that is, K = 1. Additionally, suppose that the market wage is w = 0.35.

Questions:

a) Calculate the optimal number of workers the firm will hire. Round your answer to the closest integer.

b) Suppose that the government subsidizes employment by 0.05 per worker (s = 0.05). That is, the government pays the firm 0.05 units of consumption goods for each unit of labor that the firm hires. Determine the effect of the subsidy on the firm’s hiring decision, does the firm hire more or less workers than in a).

Answer 1

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