Since the beginning of 2020, the world is suffering from the pandemic. Due to Covid-19, the...

Since the beginning of 2020, the world is suffering from the pandemic. Due to Covid-19, the demand for surgical masks surges rapidly. Assuming firms that produce surgical masks only need machines that produce surgical masks and workers that operate the machines. What do you think would happen to the equilibrium wage and unemployment, if there is no quarantine in place? And if there is? Assuming we are talking about a small closed economy.

Expert Solution

Due to COVID19 pandemic the demand for surgical masks increased with increased restriction like social distancing. The higher demand for the masks will increase the level of production. This will increase the employment rate in the mask making industries. If considering the situation where there is no quarantine takes place, the level of unemployment reduces. The increasing employment rate will increase the demand for labour. This will shift the demand curve to right. The rightward shift of the labour demand curve will increase the wage rate. Without quarantine measures there is an elasticity of supply of labour, there is no limitation to number of labours. This higher level of labour employment will increase the output level also.
Let consider that there is quarantine measures are followed by the labours. This will affect the number of the labours available for the production of mask. The labour supply is inelastic in nature. So the output rise will be less than the given above condition. But the rise of wages will be greater under this situation. Thus the rise in wage rate will not attract the labour market condition and this will be reduces the output level and higher rise in wage.

Rahul Sunny answered 2 years ago

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