Suppose the productivity of labor increases and at the same time the price of capital, which is complementary to labor, increases. As a result, the demand for labor
A) will increase.
B) will decrease.
C) may either increase or decrease.
D) will not change.

Question

Quizplus · Accepted Answer

The increase in labor productivity will lead to an increase in the demand for labor, but the increase in the price of capital will lead to a decrease in the demand for labor. Therefore, whether the demand for labor increases or decreases will depend on the magnitude of the two effects. It is possible for one effect to outweigh the other, resulting in an overall increase or decrease in the demand for labor, or for the two effects to cancel each other out, resulting in no change in the demand for labor.

Suppose the Productivity of Labor Increases and at the Same