UNL ECON 481 -Suppose the hourly wage rate is $20
Subject: Economics   / General Economics
Question
Microsoft Word – E482HW1.S17
Suppose the hourly wage rate is $20, the price of a unit of capital services is $3, and the price of a unit of output is $2. Suppose the production function satisfies the following:
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Y = AN^1/2K^1/2,
where Y is the quantity of output, N is the quantity of labor, and K is the quantity of capital.
A. What does A represent in the production function? Explain – succinctly – so that a non-expert would understand. Suppose A = 10 and the current stock of capital is fixed at 1,600 units, how much labor should be hired? What will be the capital- labor ratio? How productive will labor be on average? How much profit will be earned? Being sure to show all work, solve all these questions and explain your answers.
B. Referring back to Part A above, suppose now that A = 12. Now how much labor will be hired? Being sure to show all work, solve this question and explain your answers. What conclusion(s) can you draw about the quantity of labor hired and the variable A? Explain.
C. Ignoring Part B and referring back to Part A above, now suppose the demand for output rises so that a unit of output can now be sold for $2.50. Now how much labor will be hired? Being sure to show all work, solve this question and explain your answers. What conclusion(s) can you draw about the quantity of labor hired and the variable P? Explain.
D. Ignoring Parts B and C and referring back to Part A above, now suppose that K = 2,025. Now how much labor will be hired? Now what will be the capital-labor ratio? How productive will labor be on average? What conclusion(s) can you draw about the quantity of labor hired and the given value for K? Explain.
