Suppose that the price of capital falls. Does this necessarily imply that the demand for laborwill fall? Explain
What will be an ideal response?
No. If the price of capital falls, the factor substitution effect suggests that the firm will substitute away from the more expensive input (labor) toward the cheaper input (capital). This means that the demand for labor would in fact decrease. However, the decrease in the price of capital will also lower the cost of production, leading the firm to produce more. This is the output effect. If the firm produces more, it needs a larger level of all inputs including labor. This would cause an increase in the demand for labor. The full effect on the demand for labor depends on the relative sizes of the two effects.
You might also like to view...
Transfer payments refer to payments from the government to ________
A) other government agencies B) distribute state taxes collected by the government to individual states C) reimburse property taxes paid by states for government property leases D) certain individuals or groups
Francis Lowell's Boston Manufacturing Company:
a. specialized in the production of one type of cloth. b. combined all stages of cloth production in one plant. c. sold its product throughout the U.S. d. used power looms for weaving. e. All of the above.
What is a utility possibility frontier?
In a closed economy with no taxes in which the average MPC is 0.75, which of the following is true?
A) If income is $100 the savings is $75 B) If income is #100 then consumption is $50 C) If income is $200 then saving is $50 D) If income is $200 then consumption is $75 E) If income is $500 then saving is $100