If Capital and Labor Are Perfect Substitutes in a Production

question 18

Multiple Choice

If capital and labor are perfect substitutes in a production function, the isoquants for this function will be

• A)Concave from above
• B)Convex from above
• C)A straight line
• D)Any one of the above depending on the particular combination of labor and capital employed

---

Definitions:

Neutral Taxes

Taxes that do not affect the allocation of resources between different goods or activities in the economy.

Excess Burdens

The economic inefficiencies or losses that result from imposing taxes or government policies.

Principle of Second Best

An economic theory that suggests when a condition for a perfect market cannot be met, the next-best solution may involve violating another condition to improve efficiency.

Distortionary Tax

A tax that causes people to alter their behavior and make different economic decisions than they would in a free market, potentially leading to inefficiency.