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Q11) Consider a firm with a singlevariableinput,labor. Assume that all otheractivitiesincluded in the firm's production process are fixed for the next 12 months, and are

Q11) Consider a firm with a singlevariableinput,labor. Assume that all otheractivitiesincluded in the firm's production process are fixed for the next 12 months, and are therefore considered Expenditures.

Consider a hypothetical situationwhere there is a silent, latent, deadly, and highly contagious virus that is impacting the world (...imagine...).

  1. Graph a standard production frontier (L on the x-axis and Q on the y-axis) for a company that makes "bicycle tires" Assume this firm experiences an initial increasing returns to labor, but then experiences falling returns to labor (standard textbook non-linear example FYI) for their production function.
  2. Assume this firm is currently experiencing losses due to the Coronavirus crisis and due to the additional labor costs ("wages") they incur for worker safety and hazard pay. Draw this situation.
  3. Label everything you can with appropriate notation and subscript a (Qa,Pa, La,Wa,a ...as in the outcomes for each of these from PART A or the base case) [ = profit]
  4. Suppose that the aforementioned virus is eradicated through [vaccination/luck/everyone has gotten it already/insert your solution here] and the workplace safety protocols (masks, cleaning crews, etc.) and hazard pay are removed, essentially decreasing the wages (w) this firm experiences to the point where they are now able to break even.Graph this state of the world with the notation subscript b (as in Wb, Qb, Lb,andb with still Pa).
  5. DESCRIBE what would the outcome be if on top of this "wage" decrease, the demand for their products also increases due to an increase in disposable income across the economy.

Q12) Referring to question 11, draw an Isoquant for your level of production from part A (Qa) that shows labor and capital are "somewhat" substitutable. Assume that the initial level of TRS for 11a outcome is -2. Label your level of Labor and Capital utilized to produce this output (Qa) as La and Ka (with a hat over Ka to show it is fixed!).

Now think about how scenario B would impact this outcome in both the SHORT and LONG run for this firm's production mix. Draw a new isoquant for output and graphically visualize how the LONG RUN is impacted. What will be different and why? Please label the new isoquant QLR, the new level of Capital as KLRand the new level of labor as LLRand label any other changes you note.

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