What happens when technological advance makes available a new highly productive capital good for which MP/P is greater than that of labor for which it is a substitute resource?
A)Labor will replace the new capital because labor is now cheaper.
B)The new capital will replace labor because it reduces the firms' costs.
C)More of both the new capital and labor will be used because firms are more productive.
D)Less of both the new capital and labor will be used because the firms do not know how to use the new technology.

Question

Quizplus · Accepted Answer

When the marginal product per price (MP/P) of the new capital is greater than that of labor, it means the new capital is more cost-effective. Firms will adopt the new capital to reduce costs and increase productivity, leading to labor being replaced by the new capital.

What Happens When Technological Advance Makes Available a New Highly