Suppose capital and labor are used in fixed proportions so that each machine requires only one worker. If a decline in the price of capital occurs, then the demand for labor will
A) decrease solely because of the substitution effect.
B) increase solely because of the substitution effect.
C) increase solely because of the output effect.
D) decrease solely because of the output effect.

Question

Quizplus · Accepted Answer

In a fixed proportion production function, a decline in the price of capital will lead to an increase in production due to the output effect, as more machines (and thus more workers) can be employed, increasing the demand for labor.

Suppose Capital and Labor Are Used in Fixed Proportions So