Assume that the Welter Company is renting capital and hiring labor such that the bang per buck from each resource is the same.If wages of labor increase,its use of labor ________ and capital ________.
A) increases; falls
B) falls; falls
C) increases; increases
D) stays the same; falls
E) falls; increases

Question

Quizplus · Accepted Answer

Since the firm is renting capital and labor at the same rate (assuming perfect substitutes), an increase in wages would result in the firm substituting away from labor and towards capital. Therefore, the use of labor falls and the use of capital increases.

Assume That the Welter Company Is Renting Capital and Hiring