Question

The University is predicting at least a 15% reduction in its revenues in the Fall 2020 semester due to reduced demand for university education caused by a global pandemic. Assume a decreasing return to scale technology and a competitive market. Also, assume that the market was in the long run equilibrium prior to the pandemic outbreak.

Discuss the short run and long run implications of this reduction for:

1. the choice of the output by the university

2. capital and labour choices by the university

Answer 1

1. the choice of the output by the university - As the market was in the long run equilibrium prior to the pandemic outbreak , In the short run , this reduction will cause low output by the university in terms of students ,services , research ,maintainence of labs etc . This reduction in the revenues which is predicted t be least reduction will result in an exogenous shock in the short run but in the long run equilibrium the market will attain its new equilibrium with the self adjusting mechanism of economics and will not have a harmful effect on the choice of output by the university  

2. capital and labour choices by the university - The capital and the labour choice by the university is a very important part in dealing with this pandemic , this reduction will cause the university to hire more virtual employees on temporary basis with minimal paymnet to compensate for the reduction in the short run .whle in the log run again the self adjustment will normalise the market f education causing a new equilibrium to be set out .

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