Topic 10

Wong Wei Kang

1. The effort of a firm’s workers depends on the real wage according to the
following schedule:

Real Wage Effort

8 7
10 10
12 15
14 17
16 19
18 20

The marginal product of labor for this firm is MPN = e[102 – e×N]/15 where e is
the effort level, N is the number of workers employed, and e×N is the number of
effective labor.

If the firm can pay only one of the six wage levels shown, which should it
choose? How many workers will it employ?

There are 40 workers willing to work at a real wage of 8. Does this fact change
your answer to the first part of this question? If so, how?

2. Explain how the misperceptions theory can be used to understand the

expectations-augmented Phillips curve.