Suppose that a firm that produces face masks is in a long-run equilibrium setting where it has 3 units of capital and 3 units of labor, where MRTS = w/r, and where the firm is maximizing profits. Then suddenly in March 2020, the price of face masks increases due to increasing demand: In a graph with capital on the y-axis and labor on the x-axis, graph how the increase in price will change the firm’s input choices (labor and capital) in the short-run (when only labor can adjust). Will the new choice of inputs be on the expansion path? Suppose that new entry into the face mask production industry is impossible. In the same graph, graph how the increase in price will change the firm’s input choices in the long-run (when both labor and capital can adjust). Will the new choice of inputs be on the expansion path? Now suppose that entry into the face mask industry is free and that this is a constant cost industry. What will happen to the price in the long run? How will the firm’s input choices (labor and capital) change in the long-run?

Suppose that a firm that produces face masks is in a long-run equilibrium setting where it has 3 units of capital and 3 units of labor, where MRTS = w/r, and where the firm is maximizing profits. Then suddenly in March 2020, the price of face masks increases due to increasing demand: In a graph with capital on the y-axis and labor on the x-axis, graph how the increase in price will change the firm’s input choices (labor and capital) in the short-run (when only labor can adjust). Will the new choice of inputs be on the expansion path? Suppose that new entry into the face mask production industry is impossible. In the same graph, graph how the increase in price will change the firm’s input choices in the long-run (when both labor and capital can adjust). Will the new choice of inputs be on the expansion path? Now suppose that entry into the face mask industry is free and that this is a constant cost industry. What will happen to the price in the long run? How will the firm’s input choices (labor and capital) change in the long-run?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter12: The Partial Equilibrium Competitive Model

Section: Chapter Questions

Problem 12.14P

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Suppose that a firm that produces face masks is in a long-run equilibrium setting where it has 3 units of capital and 3 units of labor, and where MRTS = w/r. Then suddenly in March 2020, the price of face masks increases due to increasing demand: In a graph with capital on the y-axis and labor on the x-axis, graph how the increase in price will change the firm’s input choices (labor and capital) in the short-run (when only labor can adjust). Will the new choice of inputs be on the expansion path? Suppose that entry into the face mask production industry is very costly. In the same graph, graph how the increase in price will change the firm’s input choices in the long-run (when both labor and capital can adjust). Will the new choice of inputs be on the expansion path? Now suppose that entry into the face mask industry is free and that this is a constant cost industry. What will happen to price in the long run? How will the firm’s input choices (labor and capital) change in the…
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