During the Iraqi occupation of Kuwait XXXXXXXXXXsubstantial parts of the Kuwaiti capital stock were...

Question

During the Iraqi occupation of Kuwait XXXXXXXXXXsubstantial parts of the Kuwaiti capital stock were destroyed. Use labor-supply/labor-demand analysis to conjecture the effects this would have had on employ-ment and real wages provided that full employment was maintained at all times.

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Robert · Accepted Answer

Answer: 
Labor demand curve shows amount of labor a firm would formally choose to employ at each levels of 
real wage rate. We know that a firm would hire labor until marginal product of labor is equal to real wage. 
Because of diminishing returns to a factor of production, the relationship between real wage and marginal 
product of labor is negative; implying that a firm can profitably hire more labor only if the real wage fall 
enough to match the fall in marginal productivity. This implies that labor demand curve is a negatively 
sloped curve, implying that real wage and amount of labor demanded are negatively related. The labor 
demand function is derived using profit maximizing rule to the production function. We start with a given 
real wage, then using profit maximization rule, find a level of labor corresponding to that wage rate on 
production function on of labor demand curve. Given that production function represents diminishing 
returns to a factor,

During the Iraqi occupation of Kuwait XXXXXXXXXXsubstantial parts of the Kuwaiti capital stock were destroyed. Use labor-supply/labor-demand analysis to conjecture the effects this would have had on...

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