What is the equilibrium real wage

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Question: Suppose an economy characterized by the following Cobb-Douglas production function: Y = K1/3L2/3. There are 1,000 units of capital and 1,000 employees in this economy.

a) Derive an equation describing the demand for labor in the economy as a function of real wages and capital stock.

b) If wages can move freely, what is the equilibrium real wage? What are the equilibrium employment, output and total wages in the economy?

c) Assume that this economy has adopted a law that sets the minimum real wage equal to one unit of output. (The motivation of the law is to increase workers' welfare.) How does the law affect employment, total output and total wages? Does the law improve the welfare of workers? Explain. How does your answer from d) depend on the elasticity of demand for labor? Can the answer to question

d) be different? Use graphs to explain

Reference no: EM133428543

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