If technology dictates that labor and capital must be used in fixed proportions, an increase in the price of capital will cause a firm to use
A)more labor as a consequence of the substitution effect.
B)more labor as a consequence of the output effect.
C)less labor as a consequence of the substitution effect.
D)less labor as a consequence of the output effect.

Question

Quizplus · Accepted Answer

When technology dictates that labor and capital must be used in fixed proportions, an increase in the price of capital makes production more expensive, potentially reducing the quantity produced. This reduction in output (output effect) may lead to the firm using less labor, as it cannot substitute labor for capital due to the fixed proportions.

If Technology Dictates That Labor and Capital Must Be Used