Suppose a technological improvement increases the productivity of a firm's capital and, simultaneously, its workers' union negotiates a wage increase. We can predict that
A) the firm will use relatively more capital and relatively less labor.
B) the firm will use relatively more labor and relatively less capital.
C) inputs of capital and labor will be unchanged.
D) the firm's equilibrium output will necessarily increase.

Question

Quizplus · Accepted Answer

When the productivity of the firm's capital increases, it becomes more cost-effective to use capital instead of labor. However, if the workers' union negotiates a wage increase, the cost of using labor increases. Therefore, the firm will choose to use relatively more capital and relatively less labor to achieve cost efficiency.

Suppose a Technological Improvement Increases the Productivity of a Firm's