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Suppose Cheese Pizza (P) and Counterfeit Watches (W) in New York City are produced using only labor and the production functions are: P=10LpW=Lw Lp and

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Suppose Cheese Pizza (P) and Counterfeit Watches (W) in New York City are produced using only labor and the production functions are: P=10LpW=Lw Lp and Lw represent labor devoted to the production of cheese pizza and counterfeit watches, respectively, and >0 is a constant. Suppose labor supply in NYC is fixed at L=400, and the utility function of the representative New Yorker is U(P,W)=PW. Note that this utility function implies that the marginal utility of a New Yorker from one extra unit of watch consumption is higher if she has more pizza to consume. 1. (5 Points) Suppose =1. That is, one unit of labor can produce one watch. Derive and draw the New York City production possibility frontier for watch and pizza production. 2. (6 Points) Now make no assumptions on the value of . Suppose New York didn't sell or buy any pizza or watches to other places. What would be the equilibrium price ratio and equilibrium quantities of pizza and watches in New York City?] 3. (4 Points) How do the equilibrium quantities change when increases? How does the price ratio change? Notice that you can interpret as a productivity parameter: when rises, Suppose Cheese Pizza (P) and Counterfeit Watches (W) in New York City are produced using only labor and the production functions are: P=10LpW=Lw Lp and Lw represent labor devoted to the production of cheese pizza and counterfeit watches, respectively, and >0 is a constant. Suppose labor supply in NYC is fixed at L=400, and the utility function of the representative New Yorker is U(P,W)=PW. Note that this utility function implies that the marginal utility of a New Yorker from one extra unit of watch consumption is higher if she has more pizza to consume. 1. (5 Points) Suppose =1. That is, one unit of labor can produce one watch. Derive and draw the New York City production possibility frontier for watch and pizza production. 2. (6 Points) Now make no assumptions on the value of . Suppose New York didn't sell or buy any pizza or watches to other places. What would be the equilibrium price ratio and equilibrium quantities of pizza and watches in New York City?] 3. (4 Points) How do the equilibrium quantities change when increases? How does the price ratio change? Notice that you can interpret as a productivity parameter: when rises

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