What happens when technological advance makes available a new highly productive capital good for which MP/P is greater than that of labor for which it is a substitute resource?
A) Labor will replace the new capital because labor is now cheaper.
B) The new capital will replace labor because it reduces the firms' costs.
C) More of both the new capital and labor will be used because firms are more productive.
D) Less of both the new capital and labor will be used because the firms do not know how to use the new technology.

Question

Quizplus · Accepted Answer

The new capital will replace labor because it is more productive and reduces the firms' costs. The firms will prefer to use the capital because it has a higher MP/P ratio, meaning its marginal product per unit of cost is higher than that of labor. As a result, the firms will use less labor and more of the new capital in order to maximize their profits.

What Happens When Technological Advance Makes Available a New Highly