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Economics

Substitution effect

Consider a firm where production depends on two 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 with 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?

c) can we say conclusively whether the firm will use more or less labor? more or less capital?

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Macroeconomics, Economics

Category:- Macroeconomics
Reference No.:- M9211615

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