When the price of capital increases,the quantity of ________ demanded will ________,but the effect on ________ is ambiguous.
A) labor; increase; capital
B) labor; decrease; capital
C) capital; increase; labor
D) capital; decrease; labor

Question

Quizplus · Accepted Answer

According to the law of demand, as the price of a good increases, the quantity demanded for that good decreases. Therefore, when the price of capital increases, the quantity of capital demanded will decrease. However, the effect on labor is ambiguous as it depends on the production function and the substitutability of capital and labor. In some cases, an increase in the price of capital may lead firms to replace labor with capital, resulting in a decrease in the demand for labor. In other cases, it may lead firms to switch to using more labor, resulting in an increase in the demand for labor.

When the Price of Capital Increases,the Quantity of ________ Demanded