Assume the price of capital doubles and, as a result, firms make no change in the relative quantities of capital and labor they employ. This implies that
A)labor is not readily substitutable for capital.
B)the law of diminishing returns is not applicable.
C)the firms are producing an inferior good.
D)the demand for capital is highly price elastic.

Question

Quizplus · Accepted Answer

When firms do not change the relative quantities of capital and labor they employ despite the price of capital doubling, it implies that labor is not readily substitutable for capital. If labor could easily replace capital, firms would likely use more labor and less capital as the price of capital increases.

Assume the Price of Capital Doubles And, as a Result