In the Widget industry,it takes two workers (with other inputs)to produce each widget and since consumers demand 1000 widgets at its current price,2000 workers are employed in the industry.Which of the following could occur if the price of capital falls and labor and capital are substitutes in production?
A) It takes 2.2 workers per widget and 1200 widgets are produced and sold.
B) It takes 1.9 workers per widget and 1200 widgets are produced and sold.
C) It takes 2.2 workers per widget and 900 widgets are produced and sold.
D) It takes 1.9 workers per widget and 900 widgets are produced and sold.

Question

Quizplus · Accepted Answer

If the price of capital falls and labor and capital are substitutes in production, firms will use more capital and fewer workers. This implies that the number of workers required to produce each widget will decrease. Option B shows that it will take fewer workers (1.9) per widget to produce, and the number of widgets produced will remain the same (1000), given that the capital is cheaper. Hence, option B is the best choice.

In the Widget Industry,it Takes Two Workers (With Other Inputs)to