Consider an economy in which the marginal product of labor MPN is MPN = 309 – 2N
ID: 1134786 • Letter: C
Question
Consider an economy in which the marginal product of labor MPN is MPN = 309 – 2N, where N is the amount of labor used. The amount of labor supplied, NS, is given by NS = 22 + 12w + 2T, where w is the real wage and T is a lump-sum tax levied on individuals.
a. Suppose that T = 35. What are the equilibrium values of employment and the real wage?
b. With T remaining equal to 35, the government passes minimum-wage legislation that requires firms to pay a real wage greater than or equal to 7. What are the resulting values of employment and the real wage?
Explanation / Answer
(a) If T=35
Then, Labor supply, NS= 22 +12w +2T
NS = 22 +12w + 2(35) = 22 +12w + 70
NS = 92+12w
Labor demand is when w= MPN
w = 309-2N
Now, put this in labor supply equation, we get:
N = 92 + 12(309-2N)
N= 92+ 3708- 24N
25N = 3800
N= 3800/25
N= 152 (Equilibrium value of employment)
w= 309- 2N
w= 309-2(152)= 309-304
w= 5 (Equilibrium real wage)
(b) With T remaining equal to 35, the government passes minimum-wage legislation that requires firms to pay a real wage greater than or equal to 7.
Now, put w=7
NS= 92+ 12(7)
= 92 + 84
N= 176 ( Value of employment)