If the price of capital declines, the consequent output effect would be
A) greater, the more elastic the demand for the product.
B) greater, the less elastic the demand for the product.
C) negative.
D) of consequence only if capital and labor are used in fixed proportions.

Question

Quizplus · Accepted Answer

When the price of capital declines, the cost of producing goods and services decreases, leading to an increase in output. The magnitude of the output effect is determined by the elasticity of demand for the product. If the demand for the product is more elastic, a decrease in the price of the product would result in a greater increase in the quantity demanded, and hence a greater increase in output. Therefore, the output effect would be greater, the more elastic the demand for the product (Choice A).

If the Price of Capital Declines, the Consequent Output Effect