Consider an economy with an aggregate production function Y=aK+bL,a,b>0. K is fixed in short run.Perfectly compititive producers take the nominal wage W and price level P as given and employ labour as to maximize profits.this generates the labour demand shedule. the labour supply shedule is Ls=-y+d W/p where y,d>0. Producers and workers have perfect information about P and W.
23.The labour market will clear iff
24.Assume that condition in previous question holds and W is fixed.the short run AS will look like
25.If there is one shot increase in fixed stock of K,then short run AS will
b shift down
c.shift to the left
d.shift to right
26.in there is one shot increase in fixed W then AS will
a shift up
c.shift to left
d shift to right
Pls equate MRPL = W for firms profit max.
P * MPL = W
P*beta = W
MPL would be Marginal productivity.
sub that W in Ls and make sure its greater than 0.
2) get the W accordingly and get Ls from it then sub into Y
then solve for the remaining questions.
Keep in mind that Y would be on horizontal axis so increase in Y would make the graph move right for constant P and increase in P would move graph up for constant Y
sonu for 24,labor mkt to be cleared its necessery that labor supply nd dd intercect...in this case labor dd curve is horizontal....option a is required to ensure that ld &ls intersect...
in question 25.....i am convinced that As wud be vertical for high prices and downward sloping for mid prices but why is it vertical for low prices.....????????