Final answer:
The value of each worker's marginal product depends on the market price of the product. The labor demand curve is an inverse relationship between real wage and employment level. The equilibrium wage, employment level, and full employment output can be determined by finding the intersection of the labor supply and demand curves.
Step-by-step explanation:
The value of each worker's marginal product depends on the market price of the product. In a perfectly competitive market, the demand for labor is equal to the marginal product of labor multiplied by the market price. The graph of output as a function of labor, with fixed capital, would exhibit diminishing marginal returns, showing that as more labor is added, the increase in output becomes smaller.
The labor demand curve, Nᴰ(w), as a function of the real wage w, can be determined by substituting the given value of A into the expression for MPN. Solving for N, we find that the labor demand curve is an inverse relationship between real wage and employment level.
If labor is supplied inelastically with a fixed supply of 10, the equilibrium wage w, employment level N, and full employment output Y can be determined by finding the intersection of the labor supply curve and the labor demand curve. The equilibrium wage will be determined by the intersection point and the employment level N and full employment output Y can be read from the graph.
In the case of a productivity shock where A increases to 6, the new equilibrium wage w, employment level N, and full employment output Y can again be determined by finding the intersection point of the new labor demand curve and the labor supply curve.
Graphically, the original labor supply and demand curves can be depicted as NS and ND respectively. After the productivity shock, the new labor demand curve can be denoted as ND. The change can be shown by shifting the labor demand curve to the right.