Suppose a technological improvement increases the productivity of a firm's capital and,simultaneously,its workers' union negotiates a wage increase.We can predict that:

A) the firm will use relatively more capital and relatively less labor.
B) the firm will use relatively more labor and relatively less capital.
C) inputs of capital and labor will be unchanged.
D) the firm's equilibrium output will necessarily increase.

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Brandon Thomas · Accepted Answer

Final Answer : A, Explanation :  With the increase in productivity of capital, it becomes relatively cheaper for the firm to use more capital than labor. On the other hand, with the wage increase, it becomes relatively more expensive to use labor. Therefore, the firm will substitute capital for labor and use relatively more capital and relatively less labor.

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