Suppose the representative firm of the economy has a production function of the form F(K, N) = AK0.5N 0.5 . The marginal product of labor is then given by MP N = 0.5AK0.5N −0.5 . The current capital stock is K = 40
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Suppose the representative firm of the economy has a production function of the form F(K, N) =
AK0.5N 0.5 . The marginal product of labor is then given by MP N = 0.5AK0.5N −0.5 . The current capital
stock is K = 40.
(a) Holding fixed capital at 40, draw a graph of output as a function of labor. What are some important
features of this graph?
(b) If A = 4 what is the Labor Demand Curve, ND(w), as a function of the real wage w?
(c) Suppose labor is supplied inelastically with NS(w) = 10. What is the equilibrium wage w, employment
level N, and full employment output Y ?
(d) Suppose that productivity unexpectedly increases to A = 6. What is the new equilibrium wage w,
employment level N, and full employment output Y ?
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