"Consider an economy with the following CobbDouglas production function: Y=5K1/3L2/3. Derive
the equation describing labor demand in this economy as a function of the real wage and the
capital stock. (Hint: Review Chapter 3.) The economy has 27,000 units of capital and a labor force
of 1,000 workers. Assuming that factor prices adjust to equilibrate supply and demand, calculate
the real wage, the total output, and the total amount earned by workers. Now suppose that
Congress, concerned about the welfare of the working class, passes a law setting a minimum
wage that is 10 percent above the equilibrium wage you derived in part (b). Assuming that
Congress cannot dictate how many workers are hired at the mandated wage, what are the effects
of this law? Specifically, calculate what happens to the real wage, the employment, the output, and
the total amount earned by workers. Does Congress succeed in its goal of helping the working
class? Explain. Do you think that this analysis provides a good way of thinking about a minimum-
wage law? Why or why not? ".
Consider an economy with the following CobbDouglas product.pdf
1. "Consider an economy with the following CobbDouglas production function: Y=5K1/3L2/3. Derive
the equation describing labor demand in this economy as a function of the real wage and the
capital stock. (Hint: Review Chapter 3.) The economy has 27,000 units of capital and a labor force
of 1,000 workers. Assuming that factor prices adjust to equilibrate supply and demand, calculate
the real wage, the total output, and the total amount earned by workers. Now suppose that
Congress, concerned about the welfare of the working class, passes a law setting a minimum
wage that is 10 percent above the equilibrium wage you derived in part (b). Assuming that
Congress cannot dictate how many workers are hired at the mandated wage, what are the effects
of this law? Specifically, calculate what happens to the real wage, the employment, the output, and
the total amount earned by workers. Does Congress succeed in its goal of helping the working
class? Explain. Do you think that this analysis provides a good way of thinking about a minimum-
wage law? Why or why not? "
