Suppose all firms in this industry are earning normal profits. The government subsequently implemented a policy to subsidise the wages of workers which leads to a decrease in wages.

(a)

State and explain the impact of the decrease in wage level of workers on the cost curves (MC, AFC, AVC and ATC) of a typical firm in the industry. Assume that the workers will only be hired and paid when there is production.

(b)

Based on your answer in (a), explain the impact of the wage decrease on the firms in the industry in the short run and long run.

(c)

Explain how your answers in (a) will be different if instead of a wage decrease, there was a decrease in business licensing fee which all firms in the industry have to pay due to new government policy.

Figure 2 Price MC 32 ATC 30 27 24 AVC 21 20 15 14 AR 13 10 MR 45 50 58 64 72 Quantity