1.) Suppose Bob owns a pizza place in a competitive market. If an additional wor

Question

1.) Suppose Bob owns a pizza place in a competitive market. If an additional worker offers marginal productivity of 40 pizzas which can sell for $5 each, what is the highest wage Bob should be willing to pay that worker? Show your work and explain your reasoning.

2.) Consider the market for managers. Suppose job growth increases the labor demand for managerial labor. Also assume that the opportunity cost of earning the MBA increases for many people. Let’s assume it typically takes about two years to complete the MBA, so what happens to the equilibrium wage for managers in two years other things equal? Use the supply and demand model to explain your reasoning: Because I have not said anything about the relative size of the shifts you will need to draw two pictures in order to fully characterize the possible results.

Explanation / Answer

1) in perfect competition we have large number of inputs and large number of employers. So the equilibrium for inputs is reached where marginal cost of hiring an additional input is equal to value of marginal benefit from hiring the additional input. By doing so profit is maximised.

w is marginal cost.

P is Price of pizza

MP is marginal productivity

Therefore at profit maximisation, w = P*MP

Maximum wage= 5*40= 200

200 is the highest wage Bob should pay.

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