Question

please answer part a and part b from the calculations shownin the last attachment

* 3. The Black Death: In the middle of the fourteenth century, an epidemic known as the Black Death killed about a third of Europe's population, about 34 mil- lion people. While this was an enormous tragedy, the macroeconomic con- sequences might surprise you: over the next century, wages are estimated to have been higher than before the Black Death. (a) Use the production model to explain why wages might have been higher. (b) Can you attach a number to your explanation? In the model, by how much would wages rise if a third of the population died from disease

Answer 1

a. we know labours are paid according to their marginal product(we'll assume price of the product is 1 now)

hence wage=1xMPL=MPL

ginen, Y = AKO. 3 (0.7 now & amp; = marginal product of the labor .: MP = 2 (AKO.3 (0.7) = AKO.3 L 0.7-1 (0.7) = 0.7 A K0.3, 0.7 = 0.7Y L 0.11 0.7Y MP =

now let's say after disease, anly x % (x (100) of initial labour force were left. new after disease y te cep Ako? ( 10.7 Ак 07 after disease wage = met 07 1 do 07- OO

a 1-0.3 00 now 100 >I as 24100 100 (600)">1 mp * .: ... mp * > MPL : after disease behore drease wage Wage.
NOW LET'S UNDERSTAND THE SITUATION WITHOUT MATHS

after disease the labour supply will fall hence wage will increase!(because other factors are remaining the same)

after disease labour supply wage after disease before disease labour supply wage before disease MP(L)/Labour demand curve Qunatity of labour

b. Let's say Our initial situation,

A=10

K=20

L=60

hence our total production will be Y= 10x20^0.3x60^0.7=431.533856

hence our wage=MP_L=0.7Y/L=0.7x431.533856/60=5.034561653

Now let's say one-third labour died hence only 60-20=40 labours left

Now the value of Y in this situation will be=324.9009585, and hence wage will be= 5.68576674

Now theoretically we have, before disease Y=AK^0.3L^0.7 , Wage=MP_L= 0.7(AK^0.3L^0.7)/L=0.7Y/L

let's say 1/3 of labour died. hence total labour labour left now is 2/3L

hence now our Y will be Y*=AK^0.3(2/3 x L)^0.7=(2/3)^0.7 xAK^0.3L^0.7=(2/3)^0.7Y

and wage will be Wage*=0.7x(2/3)^0.7Y divided by 2/3L=0.79 Y/L

hence wage*/wage= 0/79/0.7=1.1285

hence wage will increase by 1.128571429 times if third of the labour dies

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