1st Midterm answer

1st Midterm answer - Econ 352 Intermediate Macroeconomics...

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Econ 352 YiLi Chien Intermediate Macroeconomics Spring 2011 1 st Midterm Answer Part One (40 pts) 1. (15 pts) Consider the decision of the competitive, profit- maximizing firm. a) (10 pts) Explain the intuition why the competitive, profit-maximizing firm chooses the optimal labor allocation according to the following equation L W MP P = , meaning that the marginal product of labor is equal to the real wage rate. When the firm reaches its optimal labor choice decision, one additional unit increase in labor cannot increase the firm’s profit any more. Therefore, the marginal benefit of hiring one extra unit of labor must equal to its marginal cost. In real term, the marginal benefit of hiring one extra unit of labor is marginal product of labor and the marginal cost is real wage rate. Therefore, the marginal product of labor is equal to the real wage rate. b) (5 pts) In addition, what the profit- maximizing firm should do if ?
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1st Midterm answer - Econ 352 Intermediate Macroeconomics...

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