Problem Set #3 ECN 151A Summer 2017 1 Suppose Woodstock Pizza purchases labor in a competitive labor market and sells their pizza in a competitive restaurant market (with Don Vitos and Village Pizza...

1 Suppose Woodstock Pizza purchases labor in a competitive labor market and sells their pizza in a
competitive restaurant market (with Don Vitos and Village Pizza & Bakery) Their elasticity of demand
for labor is ?125 Suppose that Davis passes the new minimum wage law and the wage increases by 60
percent What will happen to the number of workers hired by Woodstock Pizza? 2 Suppose that f(E,K)=3*E2/3K1/3, K is fixed at K=50, w=2, p=3, r=1
a Solve for E*
b How much output is produced at E*?
c What are firm profits at E*?
d What is the firm demand elasticity at E*? (note: (?E/?w) is the slope of the labor demand
function, which we can find this by taking the derivative of the labor demand function we found in
part (a)) 3 a Suppose that Suppose q= 10*E1/2K1/2 What is the MRTS?
b If w=20, and r=5, what is the cost minimizing amount of labor and capital if the firm produces
q=10,000?
c What is total cost?
d Suppose instead that the first uses 10 more units of K and still produces q=10,000 How much labor
will the firm chose? 4 Don’s Doughnuts uses flour and sugar as its only two inputs These are both normal inputs with
initial prices Pflour 3= and Psugar = 6 Suppose that the prices change to become Pflour =4 and Psugar = 10
a In which direction will the substitution effect change the Don’s amount of flour and sugar used?
b In which direction will the scale effect change the Don’s amount of flour and sugar used?
c Can we say conclusively whether Don’s will use more or less flour? More or less sugar? The following question is a practice problem and is NOT graded Do not turn it in Try to
complete it before I post the answer key
5 a Suppose Melony is a hair stylist and can wash hair with only two inputs—shampoo and
conditioner These two inputs are also perfect substitutes (she can wash hair with shampoo,
conditioner, or any combination) The existing technology allows Melony substitute 1 unit of
shampoo for 3 units of conditioner when washing hair What is the ratio of the marginal product of
shampoo to the marginal product of conditioner?
c Melony wants to wash 12 heads If the price of shampoo is $20 and the price of conditioner is $5,
then what combination of shampoo and conditioner will Melony chose in order to wash 12 heads?
d Draw the isoquant and isocost curves for this problem and the cost minimizing solution on a
graph with conditioner on the vertical axis and shampoo on the horizontal 6 When the cost of fortune tellers fell by 3%, the demand for psychologists rose by 2% What is the
cross-wage elasticity of demand for psychologists? Are psychologists and fortune tellers gross
substitutes or gross complements?