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Consider a firm for which production depends on two normal inputs, labor and capital, with prices w and r, respectively. Initially the firm faces market prices of w = 6 and r = 4. These prices then shift to w = 4 and r = 2.

(a) In which direction will the substitution effect change the firm’s employment and capital stock?

(b) In which direction will the scale effect change the firm’s employment and capital stock?

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M92001905

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