Suppose that land and capital are substitute resources.If rent rose,then the employment of capital would be _____ by the substitution effect and _____ by the output effect.

Question

Quizplus · Accepted Answer

When rent rises, the substitution effect leads to increased use of capital as firms substitute away from the now more expensive land. However, the output effect may decrease the use of capital because the overall cost increase could reduce production levels.

Suppose That Land and Capital Are Substitute Resources