Suppose a technological improvement increases the productivity of a firm's capital and, simultaneously, its workers' union negotiates a wage increase. We can predict that
A)the firm will use relatively more capital and relatively less labor.
B)the firm will use relatively more labor and relatively less capital.
C)inputs of capital and labor will be unchanged.
D)the firm's equilibrium output will necessarily increase.

Question

Quizplus · Accepted Answer

The technological improvement makes capital more productive, encouraging the firm to use more capital. The wage increase makes labor more expensive, discouraging the use of labor. Together, these changes lead the firm to use relatively more capital and less labor.

Suppose a Technological Improvement Increases the Productivity of a Firm's