Suppose that capital and labor are substitutes in production. In other words, the firm can generally use capital or labor to get the production completed. Suppose the cost of capital increases greatly. How will this affect the demand for labor?

Question

Dylan Rivas

Business

16 May, 15:52

Suppose that capital and labor are substitutes in production. In other words, the firm can generally use capital or labor to get the production completed. Suppose the cost of capital increases greatly. How will this affect the demand for labor?

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Answers (1)

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Antony Solis · Answer 1

Demand for labor will increase

Explanation:

Substitute factors of production refers to factors of production that are similar and comparable, and therefore one of the factor can be used to replace another factor.

When two factors of production are substitutes, an increase in the price of one will lead to an increase in the demand for the other since the aim of any is to minimize the cost of production.

Therefore, if the cost of capital increases greatly, it will lead to an increase in the demand for labor since capital and labor are assumed to be substitutes in production.