Assume the Price of Capital Doubles And, as a Result

question 40

Multiple Choice

Assume the price of capital doubles and, as a result, firms make no change in the relative quantities of capital and labor they employ. This implies that

• A) labor is not readily substitutable for capital.
• B) the law of diminishing returns is not applicable.
• C) the firms are producing an inferior good.
• D) the demand for capital is highly price elastic.

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Definitions:

Activity-Based Costing

A method in managerial accounting that assigns costs to products or services based on the activities that go into producing them.

Production Departments

Specific areas or divisions within a manufacturing facility where the actual production or assembly of products takes place.

Activity Cost Pools

A grouping of all the costs related to a specific activity, used in activity-based costing to allocate costs more accurately.

Factory Overhead Costs

Refers to indirect manufacturing costs that are not directly tied to a specific product, such as maintenance, utilities, and rent.