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Unformatted text preview: employed. Assume that labor is the only variable input in the production and the production function is given by Figure 1. If the workers want to maximize their wage rate, how much labor will they employ? Now assume that the price level increases. As a result, the production function shifts upward. What will happen to the optimal level employment and real output Y? (Hint: Determine graphically the L that maximizes PY/L.) Suppose the demand curve for the output shifts upwards, what will happen to output in this economy? PY Figure 1 L 5) Suppose the utility function of a person is Cobb-Douglas, i.e., U(X, Y) = AX α Y β . Let Px, Py, and I represent the price of good X, the price of good Y and income, respectively. Derive the demand function of good X in terms of Px, Py and I. (Hint: You may use the result on p. 12 of the Lecture Notes. Chap. If you are good at calculus, you will also find the appendix of Chapter 4 useful.)...
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- Spring '08