Question

Assume that the price of capital equipment, which can be used as a substitute for labor, decreases, and the substitution effect exceeds the output effect. Which of the following effects would the declining price of capital have in a perfectly competitive labor market?
I. The demand for labor would decrease.
II. The industry wage would decrease.
III. The cost of production would increase.
IV. The price of the product would increase.
a) I only
b) Ill only
c) I and Il only
d) I, II, III, and IV
e) III and IV only

Answer 1

Answer:

A

Explanation:

If price of equipment which can be used as substitute for labour then company will prefer to buy that equipment which will decrease the demand for labour in a perfectly competitive labour market. Equipment will work as the replacement of labour.