If technology dictates that labor and capital must be used in fixed proportions, an increase in the price of capital will cause a firm to use
A) more labor as a consequence of the substitution effect.
B) more labor as a consequence of the output effect.
C) less labor as a consequence of the substitution effect.
D) less labor as a consequence of the output effect.

Question

Quizplus · Accepted Answer

When labor and capital are used in fixed proportions, an increase in the price of capital raises production costs, potentially reducing output and thus requiring less labor.

If Technology Dictates That Labor and Capital Must Be Used