Question

Choose a,b,c,d

icular production process that capital and labor are perfect l. If the 7. Suppose in a part substitutes so that three units of labor are equivalent to one unit of capita price of capital is s4 per unit and the price of labor is si per unit, the firm should A) employ capital only B) employ labor only C) use three times as much capital as labor. D) use three times as much labor as capital.

Answer 1

Option B.

• Given that the capital and labour are the perfect substitutes of each other so that if the price of anyone goes Higher then the other one can be employed by the firm.
• It is also given that the employing three units of labour is equivalent to employing one unit of capital. So we can easily substitute three units of labour with one unit of capital or vive versa.
• But the price of the capital is $4 per unit while the price of the labour is just $1 per unit.
• Hence the firm should only employ labour as a substitute of capital.