Suppose the marginal product of labor is MPN = 200

Question

Suppose the marginal product of labor is MPN = 200 - 0.5N
Where N is aggregate employment.The aggregate quantity of labor supplied is 300 + 8w,where w is the real wage.If a supply shock increases the marginal product of labor by 10 (to MPN = 210 - 0.5 N),by how much does the real wage increase?

Quizplus · Accepted Answer

To find the change in real wage after the supply shock, we need to first find the level of employment where the new marginal product of labor equals the old level of employment supply.

210 - 0.5N = 300 + 8w

Subtracting 210 and 300 from both sides, and dividing by -0.5, we get:

N = -2(8w - 45)

Simplifying, we have:

N = 90 - 16w

To find the new real wage, we set the new level of employment equal to the old level of employment plus the supply shock:

300 + 8w' = 90 - 16w + 10

Simplifying, we get:

w' = w + 1

Therefore, the real wage increases by 1 after the supply shock. The correct answer is B.