Assume that capital and labor are substitutes in production.The output effect of an increase in the price of capital decreases the demand for labor.

Question

Quizplus · Accepted Answer

If capital and labor are substitutes in production, an increase in the price of capital will cause firms to substitute capital for labor, resulting in a decrease in the demand for labor. This is because when the price of capital rises, it becomes relatively more expensive to use labor, and firms will switch to using more capital instead.

Assume That Capital and Labor Are Substitutes in Production