Jon runs a bar in New York City. A city law prevents smoking in New York bars, but Jon is able to convince a friend in city hall to grant his bar a smoking permit by exploiting some fancy loopholes in the law.
While smoking enables Jon to charge a premium to the customers (higher drink prices), his workers are subject to second-hand smoke. Therefore Jon has to pay his workers a wage higher than he otherwise would. Assuming Jon's production function is f(L,K) = LK1-, where L is the quantity of workers and K is the quantity of capital, how does Jon's optimal capital-to-labor ratio compare to similar bars without smoking?
Question 2
When all costs and benefits in a cost-benefit analysis do not occur at the same point in time, a discount rate is used to _____.
a. reduce the future costs and benefits relative to current costs and benefits
b. increase future costs and benefits relative to current costs and benefits
c. increase current costs relative to future benefits
d. reduce future costs relative to current costs
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