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 long-run?

Given information Face mask industry is working in the market. Where Units of capital is used =3…

Answered: Suppose that a firm that produces face…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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:

1. 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?
2. 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?
3. 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 long-run?

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