Assume the price of capital doubles and, as a result, firms make no change in the relative quantities of capital and labor they employ. This implies that
A) labor is not readily substitutable for capital.
B) the law of diminishing returns is not applicable.
C) the firms are producing an inferior good.
D) the demand for capital is highly price elastic.

Question

Quizplus · Accepted Answer

If firms make no change in the relative quantities of capital and labor they employ when the price of capital doubles, it implies that they cannot easily substitute labor for capital. Therefore, the answer is A, labor is not readily substitutable for capital.

Assume the Price of Capital Doubles And, as a Result