Suppose capital is readily substitutable for labor and that the price of capital falls. We can conclude that the
A)substitution effect will tend to reduce the demand for labor.
B)output effect will tend to reduce the demand for labor.
C)demand for labor will necessarily decline.
D)demand for labor will necessarily increase.

Question

Quizplus · Accepted Answer

When the price of capital falls, firms are more likely to substitute capital for labor because it becomes relatively cheaper. This substitution effect reduces the demand for labor as firms opt to use more capital in their production processes.

Suppose Capital Is Readily Substitutable for Labor and That the Price