The production function is: Y = (A)*(K^α)*(L^(1-α)/2)*(H^(1-α)/2)
where α is a constant 0 < α < 1, A is the level of total factor productivity for the economy, K is the aggregate stock of physical capital employed, L is the number of workers employed, and H is the level of human capital which equals the number of post-secondary degrees held by workers
i)Suppose that automobiles are produced by workers without post-secondary education and the economy is hit with an unexpected (permanent) reduction in the demand for automobiles. This results in a drop in the demand for these workers. What happens in the long-run to the level of employment and real wage in BOTH of these labour markets? Explain in words how why you have come to these conclusions.
ii)Suppose the situation described in part (i) above occurs BUT the economy also has a minimum wage law that puts a legal lower bound on the real wage (in reality these laws limit the nominal wage paid to be at least some minimum level or more). Explain how and when this situation results in a different answer than that described in part (i) above.
where α is a constant 0 < α < 1, A is the level of total factor productivity for the economy, K is the aggregate stock of physical capital employed, L is the number of workers employed, and H is the level of human capital which equals the number of post-secondary degrees held by workers
i)Suppose that automobiles are produced by workers without post-secondary education and the economy is hit with an unexpected (permanent) reduction in the demand for automobiles. This results in a drop in the demand for these workers. What happens in the long-run to the level of employment and real wage in BOTH of these labour markets? Explain in words how why you have come to these conclusions.
ii)Suppose the situation described in part (i) above occurs BUT the economy also has a minimum wage law that puts a legal lower bound on the real wage (in reality these laws limit the nominal wage paid to be at least some minimum level or more). Explain how and when this situation results in a different answer than that described in part (i) above.