Problem 1
Using Assignment 3's production for Joe's Pizzeria, we have the following table. Assume the wage rate for labor is $20 (w=20). Assuming perfect competition, calculate Joe's Value of Marginal Product for Labor (VMPL)
a. Assume the wage rate for labor is $20 (w=20). What will be the optimum amount of Labor? (If VMPL are equal for two or more amounts of L, choose the highest). Why?
b. Suppose the wage rate falls to $7.50. How much will Joe choose?
Problem 2
Now assume that Joe's Pizza is a monopoly. Here is the table for Joe's Pizza.
A) Calculate Joe's Marginal Revenue Product for Labor (MRPL). What is Joe's optimal level of L if w=$22.75? Why?
B) What would be Joe's optimal L if w=$20? Why?
Problem 3
a. Suppose you won a lottery and you have the choice of receiving a lump-sum payment of $700,000 now or 5 annual payments of $200,000 per year beginning next year. Assume that the interest rate is 5% per year. Which would be the better choice? Show your calculations.
b. Now suppose they offered a lump-sum payment of $800,000. Would that change your decision? Why?
c. Suppose the interest rate was 6% and the lump sum was $700,000. Would that change your decision? Why?