Suppose that Charlie’s Pizzeria in Kalamazoo, Michigan, employs 10 employees at a wage level of $9 per person. All other costs (ovens, rent, advertising, return to capital)

total $50 per hour, and the pizzeria sells 15 pizzas per hour at a cost of $10 per pizza.

Suppose there is mandated coverage that can only be covered at a cost of $1.50 per hour, if it is offered at all. Charlie fi nds that if he offers insurance, he could maintain production by letting one worker go and running his pizza ovens a little hotter, leading to costs of

$55 per hour.

(a) What are Charlie’s original profi ts?

(b) What is Charlie’s elasticity of demand for labor? How is this calculated?

(c) What will happen to Charlie’s profi ts in the short run if he chooses to pay for mandated insurance?

(d) What will Charlie’s long-run decision be? Why?