NAME __________________________________________________ ECO 301 Spring 2012 Assignment 4 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 (VMP ) L L Q MP VMP L 0 0 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX a. Assume the wage rate for labor is $20 (w=20). What will be the optimum amount of Labor? (If VMP are equal L 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? 1Problem 2 Now assume that Joe’s Pizza is a monopoly. Here is the table for Joe’s Pizza. Problem 2 L Q p TR MRP L 0 0 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX A) Calculate Joe’s Marginal Revenue Product for Labor (MRP ). What is Joe’s optimal level of L if w=$22.75? Why? L B) What would be Joe’s optimal L if w=$20? Why? 2Problem 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? 3
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