If the Price of Labor Falls

question 116

Multiple Choice

If the price of labor falls,

• A) we can conclude that the demand for capital will always decrease because only the input-substitution effect is relevant.
• B) we can conclude that the demand for capital will always increase because only the output effect is relevant.
• C) the change in the demand for capital cannot be predicted because the input-substitution effect and output effect work in opposite directions.
• D) the demand for capital will be unaffected, because only a change in the price of capital would change the demand for capital.

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Definitions:

Expected Profitability

The forecasted return on investment for a business activity or project, considering potential profits and losses.

Interest-Rate Cost

The expense associated with borrowing money, reflected as a percentage of the total amount borrowed.

Optimal R&D

The most efficient level of investment in research and development activities that maximizes the benefit to a company or society.

Venture Capital

Funding given to startups and small businesses by investors who see potential for significant growth over time.