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If the Price of Labor Increases Relative to the Price

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If the price of labor increases relative to the price of capital, and as a result the quantity of capital hired increases, the output effect of the price increase is greater than the substitution effect.


Definitions:

Implicit Interest Rate

The interest rate that equates the present value of lease payments to the fair value of the leased asset, often used in lease agreements.

Capital Lease

A lease agreement that is considered a purchase by the lessee because of its terms, such as a bargain purchase option, which allow for the transfer of ownership over the asset's life.

Residual Value

The estimated value of an asset at the end of its useful life.

Capital Lease

A lease classified by lessees as an asset purchase, indicating that the lessee effectively has control over the asset during the lease term.

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