Question: 1. a. b. C. d. Let K and N denote respectively capital and labour input. Suppose a firm has current and future marginal productivity

1. a. b. C. d. Let K and N denote respectively capital and labour input. Suppose a firm has current and

1. a. b. C. d. Let K and N denote respectively capital and labour input. Suppose a firm has current and future marginal productivity of capital given by MPK= 10,000 - 2K+ N, and marginal productivity of labour given by MPN = 50-2N+K. Further suppose the price of capital is $5,000, the real interest rate is 10%, and capital depreciates at a rate of 15%, whereas the real wage is $15. Calculate the user cost of capital. Find the firm's optimal amount of employment and the size of the capital stock. Find the firm's optimal amount of employment and the size of the capital stock if the government introduces a minimum wage law such that the minimum real wage is $12. Explain your numerical findings in terms of the underlying economics. Repeat c above except that the minimum real wage is set at $21 instead. Again explain in terms of the underlying economics. Now return to the original given situations. Find the impacts on the firm's optimal amount of employment and the size of the capital stock if the central bank changes its monetary policy stance to fight against inflation such that the real interest rate changes by 5% (assuming the central bank is able to do so).

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a To calculate the user cost of capital we can use the formula UC r delta MPK Where UC is the user cost of capital r is the real interest rate delta i... View full answer

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