Question: Problem 10.5: RBC with fixed capital. (20 points) Suppose that the production function is Y = AK L where Y is output, K is

Problem 10.5: RBC with fixed capital. (20 points) Suppose that the production function is Y = AK L where Y is output, K is the stock of capital and Lt is amount of labor firms hire. Assume that Kt = 100, At = 2. 1. Firms in this economy maximize their profits, given by revenue net of labor costs: Yt - WLt. Derive the firm's labor demand curve. 2. Workers in this economy maximize their utility, given by U(Ct, Nt) log(Ct) Nt, where Ct is consumption and N is the amount of labor workers supply. Their budget constraint is Ct = WtNt. Derive the workers' labor supply curve. = 3. Calculate the equilibrium wage rate and employment in this economy using the expressions for labor demand and supply you derived above. Also calculate the total amount of output the economy produces. 4. Suppose that productivity doubles, to At = 4. Calculate what happens to the wage rate, employment and output. Illustrate the effects of this increase in productivity graphically, using a labor demand/supply diagram.

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