Suppose that Taher's pizza business operates under competitive conditions and that his short-run production function is q=20√E.
a) How much labor does he employ if the price of each pizza is p = $12 and the hourly wage is w0 = $6? [Hint: In this case, it can be shown that the marginal product of labor is MPE = 10/√E . ]
b) What happens to the quantity of labor he demands if the wage increases to w1 = $12?
c) Once again assume w = $6 but suppose the government imposes a tax of τ = 25% on each dollar he pays his workers, to cover their health insurance costs (this is called a payroll tax). Ceteris paribus, what happens to his employment level?
d) Suppose the conditions set out in (a) hold. All else equal, what happens if the government imposes a 25% tax on his profits?