Consider a firm using three inputs: unskilled labor,skilled labor,and capital.Unskilled labor and capital are substitutes in production,while skilled labor and capital are complements in production.If the price of capital decreases,then
A) employment of skilled labor increases and employment of unskilled labor decreases.
B) employment of both skilled and unskilled labor decreases.
C) employment of skilled labor increases but the effect on employment of unskilled labor is ambiguous.
D) employment of skilled labor could increase or decrease and the employment of unskilled labor definitely decreases.

Question

Quizplus · Accepted Answer

Since unskilled labor and capital are substitutes, a decrease in the price of capital will lead to a decrease in the employment of unskilled labor. On the other hand, since skilled labor and capital are complements, a decrease in the price of capital will lead to an increase in the employment of skilled labor. However, the effect on employment of unskilled labor is ambiguous, as the firm could use more skilled labor and less unskilled labor, or it could use more capital and less unskilled labor. Therefore, the correct answer is C.

Consider a Firm Using Three Inputs: Unskilled Labor,skilled Labor,and Capital