Suppose that capital and labor are perfect complements in a one-to-one ratio in a firm's production function. The firm is currently at an efficient production level, employing an equal number of machines and workers. Suppose the cost of labor were to double and the cost of capital were to fall by half. If the firm wanted to produce the previous level of output, the firm would hire:
A)more labor and less capital.
B)less labor and more capital.
C)the same amounts of labor and capital.
D)twice as much labor as capital.

Question

Quizplus · Accepted Answer

Given that capital and labor are perfect complements in a one-to-one ratio for the firm's production function, the firm needs to maintain an equal number of machines and workers to produce efficiently. Changes in the cost of labor and capital do not affect the ratio of capital to labor needed for production, so the firm would continue to hire the same amounts of labor and capital to produce the previous level of output.

Suppose That Capital and Labor Are Perfect Complements in a One-To-One