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28 Sep 2019
Consider a firm for which production depends on two normal inputs, labor, and capital, that are not perfect complements. Initially, the firm faces market prices of w = 10 and r = 8, for labor and capital. These prices then shift to w=7 andr=7.
a) In which direction will the substitution effect change the firm's employment and capital stock?
b) In which direction will the scale effect change the firm's employment and capital stock?
c) Can we say conclusively whether the firm will use more or less labor? More or less capital?
Consider a firm for which production depends on two normal inputs, labor, and capital, that are not perfect complements. Initially, the firm faces market prices of w = 10 and r = 8, for labor and capital. These prices then shift to w=7 andr=7.
a) In which direction will the substitution effect change the firm's employment and capital stock?
b) In which direction will the scale effect change the firm's employment and capital stock?
c) Can we say conclusively whether the firm will use more or less labor? More or less capital?
Chika IlonahLv10
28 Sep 2019
