An appliance manufacturer adopts a new technology that,ceteris paribus,increases the productivity of capital.At the same time,its employees unionize and demand higher wages.Assume that for this manufacturer capital and labor are substitutable.Which of the following is most likely to occur?

Question

Quizplus · Accepted Answer

The increase in productivity of capital makes it more attractive relative to labor, so the manufacturer will substitute capital for labor in production in order to keep costs down. This is because the wage increase demanded by the union makes labor more expensive, and capital is a substitute for labor. Therefore, the manufacturer will try to use more capital and fewer workers to produce the same level of output.

An Appliance Manufacturer Adopts a New Technology That,ceteris Paribus,increases the Productivity