If an increase in the cost of labor causes the firm to use less capital,then
A) the scale effect has dominated over the substitution effect.
B) the substitution effect has dominated over the scale effect.
C) the firm has moved along an isoquant curve.
D) the firm has moved onto a higher isoquant.

Question

Quizplus · Accepted Answer

An increase in labor costs leading to less capital use indicates that the firm is reducing its overall scale of production, suggesting the scale effect dominates over the substitution effect.

If an Increase in the Cost of Labor Causes the Firm