Suppose Capital and Labor Are Used in Fixed Proportions So

question 219

Multiple Choice

Suppose capital and labor are used in fixed proportions so that each machine requires only one worker. If a decline in the price of capital occurs, then the demand for labor will

• A)decrease solely because of the substitution effect.
• B)increase solely because of the substitution effect.
• C)increase solely because of the output effect.
• D)decrease solely because of the output effect.

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Definitions:

Mental Accounting

The habit of mentally assigning dollars to different accounts so that some dollars are worth more than others.

Overconfidence

The phenomenon where an individual's subjective confidence in their judgments is reliably greater than their objective accuracy.

Irrational Decisions

Choices made by individuals that contradict the best outcome from a rational point of view, often influenced by biases or lack of information.

Mental Accounting

The psychological process by which individuals classify, organize, and perceive their monetary resources and expenses.