Question

. Pierre’s Boulangerie uses some fixed inputs and labor (and, curiously, nothing else) to produce lighter than air baguettes. This may seem unrealistic, but you might take comfort in noting that the baguettes are gluten-free. Labor can be hired for 80 Euros per day, and their unique type of baguette sells for 7 Euros. Their output schedule depends on the amount of labor hired, and looks like the following:

                        Labor               Baguettes

                        0                          0

                        1                      20

                        2                      38

                        3                      54

                        4                      68

                        5                      80

                        6                      90

                        7                      98

                        8                      104

                        9                      108

A. If Pierre’s fixed costs are 120 Euros per day, what is the profit maximizing quantity of labor to hire and what will his maximum level of profits be?

B. If Pierre’s fixed costs fall to 40 Euros per day, what is the profit maximizing quantity of labor to hire and what will his maximum level of profits be? Will Pierre use the money that he saved on fixed costs to hire more labor?

C. Imagine that Pierre’s fixed costs are 120 Euros per day and there is a 50% profits tax. That is, Pierre must pay 50% of his profits in tax to the government. How will this change his profit maximizing decision about how much labor to hire?

D. Now, imagine that Pierre’s fixed costs are 120 Euros per day and there is a 20% profits tax. Will the reduction in the tax rates on profits change the profit maximizing output or number of employees? Will Pierre hire more people as a result of the reduction in the profits tax?

E. If the profits tax is eliminated, so that Pierre pays no tax on his profits, how will this change his profit maximizing quantity of labor? Will he hire more people when the profits tax is cut to zero? Will he? Will he? What impact will elimination of the profits tax have on his output and the number of people he hires?

Answer 1

Answer- (A) Fixed cost per day = 120

(C)

still The profit maximizing labour remains 5 and profits become Euro 20 because the taxes will be levied on only profits not losses.

(E) If the profits tax is eliminated, so that Pierre pays no tax on his profits, profit maximizing quantity of labor will remain same at 5 labour.

(B)