Suppose that the government subsidizes the cost of workers by paying 25% of the wage (the...

 

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Suppose that the government subsidizes the cost of workers by paying 25% of the wage (the rate offered by the U.S. government in the late 1970s under the New Jobs Tax Credit Policy program). What effect will this subsidy have on the firm's choice of labor and capital to produce a given level of output? For a given level of output, the subsidy will prompt the firm to use (a) More labor and less capital because labor becomes more productive. (b) Less labor and more capital because the last dollar spent on labor adds more extra output than the last dollar spent on capital. (c) The same quantities of labor and capital because the marginal rate of technical substitution has not changed. (d) More labor and more capital because the cost of production will decrease. (e) More labor and less capital because the marginal product of the last dollar spent on labor is greater than the marginal product of the last dollar spent on capital. Suppose that the government subsidizes the cost of workers by paying 25% of the wage (the rate offered by the U.S. government in the late 1970s under the New Jobs Tax Credit Policy program). What effect will this subsidy have on the firm's choice of labor and capital to produce a given level of output? For a given level of output, the subsidy will prompt the firm to use (a) More labor and less capital because labor becomes more productive. (b) Less labor and more capital because the last dollar spent on labor adds more extra output than the last dollar spent on capital. (c) The same quantities of labor and capital because the marginal rate of technical substitution has not changed. (d) More labor and more capital because the cost of production will decrease. (e) More labor and less capital because the marginal product of the last dollar spent on labor is greater than the marginal product of the last dollar spent on capital.

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Answer Correct option C more labor and less capital because the marginal product o... View the full answer