If the Price of Labor Falls Relative to the Price

question 102

Multiple Choice

If the price of labor falls relative to the price of capital,and as a result the quantity of capital employed decreases,it can be concluded that:

• A) the substitution effect is greater than the output effect.
• B) the output effect is greater than the substitution effect.
• C) the income effect is greater than the output effect.
• D) labor cannot be easily substituted for capital.

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Definitions:

Capital Structure

The mix of debt and equity financing used by a firm to fund its operations and growth.

Planning Horizon

Planning horizon refers to the period time a person or organization looks into the future when preparing strategies or making decisions.

Sustainable Growth

The rate at which a company can grow its sales, earnings, and dividends without increasing its equity or taking on new debt.

Earnings Retention

The portion of a company's profit that is kept or retained rather than distributed to shareholders as dividends.