Assume that a firm has a production function Y = 1,000L
1/2, where Y is output and L
is labour. Labour demand is L
and labour supply is L
31,250(W/P). Initially, there is an equilibrium in which output is 250,000,
employment is 62,500, the nominal wage is 20, and the price level is 10. Demand for
output is 250,000 at the given price, so all output is sold. Suddenly, demand at the
given price drops to 200,000, but the firm does not lower its price. It lowers output
and lays off workers.
A) Assuming that the firm cannot produce for inventory, how much will the firm
want to produce?
B) Assuming output equals the amount given under part a, what employment
force will the firms want to hire?
C) If the firm continues to pay the same nominal and real wage, how much more
labour will workers wish to supply than the firm will want to hire?
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