An increase in the wage rate will have a greater effect on average costs
A)the larger the proportion labor costs are of total costs and the easier it is to substitute capital for labor.
B)the larger the proportion labor costs are of total costs and the harder it is to substitute capital for labor.
C)the greater is the diminishing marginal product of labor.
D)the greater are returns to scale.

Question

Quizplus · Accepted Answer

When labor costs make up a large proportion of total costs, an increase in wages will have a bigger impact on average costs. If it is difficult to substitute capital for labor, then the firm may not be able to offset the cost increase with other factors of production. This can lead to higher prices for consumers and lower profits for the firm. The other choices are not directly related to the impact of a wage increase on average costs.

An Increase in the Wage Rate Will Have a Greater