A Firm Is Currently Using Two Inputs: Labor and Capital

question 71

Multiple Choice

A firm is currently using two inputs: labor and capital. It rents equipment for $1,000, which produces a value of the marginal product of $5,000. It hires workers at $10 an hour who produce a value of the marginal product of $100. The wages of workers rise by 20% and the rental price of capital increases by 25%. The firm should hire _________ labor and _________ capital.

• A) more; more
• B) more; less
• C) the same amount; the same amount
• D) less; more
• E) less; less

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Definitions:

Hindsight Bias

The tendency to believe, after an event has occurred, that one would have predicted or expected the outcome, even though it was not predictable.

Overconfidence Bias

The tendency of individuals to overestimate their own abilities, skills, or chances of success.

Predictions Incorrect

Situations where anticipated outcomes fail to materialize as expected due to various factors such as flawed assumptions or unforeseen events.

Confirmation Bias

A tendency to search for, interpret, and remember information in a way that confirms one's preconceptions.