1. the real wage rate is set independently of the level of employment.
2. the level of employment does not depend on the real wage setting.
3. both of the above are true.
4. neither of the above are true.
Choose the correct option.
Option 1 is the correct choice. Workers put forth a level of effort that is positively related to the real wage offered. Firms will set the real wage rate at that level at which the elasticity of effort with respect to the real wage rate is unity---the Solow Condition. This wage setting will not depend on the number of workers employed. Then firms will choose the optimum number of workers to employ, given the optimal wage setting. The level of employment will therefore depend on the wage setting, so option 2 is incorrect.
Recall that it pays firms to increase the wage rate to the point where the resulting percentage increase in effort is the same as an additional percentage increase in the wage rate and then, having established the equilibrium wage, to adjust the level of employment to its profit-maximizing level.