Suppose there is a firm who hires workers as part of their production. The firm makes use of two input: labour (L) and capital (K). Their marginal product of labour is given by: MPL = (100 – 10L+ KL) - Assume that we are in the short-run (capital is fixed). Also assume that firm currently owns 5 units of capital. The price of the output that they are producing is currently $1. 8. Describe, in words, the relationship here between capital and the productivity of labour. How does this mean the quantity of capital is likely to affect labour demand? Now suppose that households in this local economy work in the labour market. They supply their labour according to: Qs = w – 10 9. Draw the labour supply curve and the Marginal Revenue Product of Labour (MRPL) curve. Also label the labour market equilibrium (w* & L*). Show your work for how w* and L* are found. Be sure to label then x-intercepts and y-intercepts for both curves. Have the quantity of labour (L) on the x-axis and the wage rate on the y-axis. Now suppose that the firm is able to increase its units of capital from 5 units to 7 units of capital. 10. What happens to labour demand? Show another figure with the new labour demand curve and the same supply curve. Be sure to label then x-intercept and y-intercept of this new demand curve. Haver the quantity of labour (L) on the x-axis and the wage rate on the y-axis. What is the new equilibrium wage rate and the number of units of labour employed? Show your work.

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