Question

Suppose that there is an increase in the cost of a unit of labor (i.e., a wage increase). In the long run:
a. What will be the substitution effect of this change on use of capital and labor, and why? How would this substitution effect be shown on an isoquant diagram?
b. What will be the scale effect of this change on use of capital and labor, and why? How would this scale effect be shown on an isoquant diagram?
c. What will be the net or total effect of this decline in the cost of capital on the use of capital and labor?



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  • CreatedJuly 29, 2013
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