If capital becomes very expensive and labor is cheap, a producer will want to use more units of labor and fewer units of capital if the technology permits this substitution. What measures how freely the producer can vary inputs as their relative prices change, but the amount of output produced remains constant?
A) homothetic production function
B) elasticity of substitution
C) income elasticity of demand

Question

Quizplus · Accepted Answer

The elasticity of substitution measures the degree to which a producer can substitute one input for another without changing the level of output. It is calculated as the percentage change in the ratio of two inputs in response to a percentage change in their relative prices, while holding output constant. Therefore, the elasticity of substitution is the measure that indicates how freely the producer can change inputs as their relative prices change while keeping output constant, which makes it the best choice among the given options.

If Capital Becomes Very Expensive and Labor Is Cheap, a Producer