If the rental rate increases, we know that output and labor input will fall in the long run.

Question

Quizplus · Accepted Answer

The relationship between rental rate increases and output and labor input in the long run is not deterministic. An increase in the rental rate could lead to a substitution effect towards more labor-intensive production methods if labor is a substitute for capital, potentially increasing labor input. The effect on output depends on the production function and the elasticity of substitution between inputs.

If the Rental Rate Increases, We Know That Output and Labor