Asked by vitor zucco on May 07, 2024
Verified
Suppose capital and labor are used in fixed proportions so that each machine requires only one worker.If a decline in the price of capital occurs,then the demand for labor will:
A) decrease solely because of the substitution effect.
B) increase solely because of the substitution effect.
C) increase solely because of the output effect.
D) decrease solely because of the output effect.
Fixed Proportions
A production process where inputs are used in strict, unchangeable ratios.
Substitution Effect
The change in consumption patterns due to a change in the relative prices of goods, leading consumers to substitute one good for another.
- Develop an understanding of how labor and capital demand are affected by substitution and output effects.
Verified Answer
MG
Muskan GuptaMay 09, 2024
Final Answer :
C
Explanation :
Given that capital and labor are used in fixed proportions, a decline in the price of capital makes it cheaper to produce goods, potentially increasing production. This increase in production (output effect) would require more labor due to the fixed ratio of capital to labor, hence increasing the demand for labor.
Learning Objectives
- Develop an understanding of how labor and capital demand are affected by substitution and output effects.