Suppose the cost of renting capital increases (shown by an increase in r). a. What happens...
Suppose the cost of renting capital increases (shown by an increase in r).
a. What happens to the amount of labor the firm chooses to maximize profits?
b. What happens to the equilibrium quantity of labor demanded and the equilibrium wage rate?
Homework Answers
If the cost of renting capital increases, the total cost of producing output increases. The firm might choose to replace capital with labors if they are comparatively cheaper. This will lead to a rise in amount of labor the firm chooses to maximize profits.
With an increase in demand of labor, the equilibrium quantity of labor increases. This will push the equilibrium wage upwards.
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