11F_Quiz2_Sol - Econ 204 Instructor J Li 1 QUIZ 2 ANSWERS...

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Unformatted text preview: Econ 204 Instructor: J. Li 1 QUIZ 2 ANSWERS, FALL 2011 Given: production function: ¡ ¢£¤¥ ¦§ ¡ ¤ ¨©ª ¦ «©ª (a) Find: the labour demand function L D = F ( W / P , K ). The demand for labour is determined by the amount of labour that a profit- maximizing firm wants to hire at a given real wage. The profit-maximizing condition is that firm hires labour until the marginal product of labour, MPL , equals the real wage, ¬­¦ ¡ ®©­¯ . +0.25 The MPL is found by partially differentiating the production function with respect to (w.r.t.) labour, ¬­¦ ¡ °± °² ¡ ³£¤ ´ µ ¦ ¶ µ §©³¦ ¡ « ª ¤ ´ µ ¦ · ´ µ +0.25 In order to solve for labour demand, we set the MPL equal to the real wage and solve for L : « ª ¤ ´ µ ¦ · ´ µ ¡ ¸ ¹ +0.25 ¦ º ¡ ¢ » ¸ ¹ ¥ ¤¼ ¡ ½ «¾ ¤£ ¸ ¹ § ·ª ¿ +0.25 Notice that this expression has the intuitively desirable feature that an increase in the real wage reduces the demand for labour....
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11F_Quiz2_Sol - Econ 204 Instructor J Li 1 QUIZ 2 ANSWERS...

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