Suppose that the price of capital falls. Does this necessarily imply that the demand for laborwill fall? Explain
What will be an ideal response?
No. If the price of capital falls, the factor substitution effect suggests that the firm will substitute away from the more expensive input (labor) toward the cheaper input (capital). This means that the demand for labor would in fact decrease. However, the decrease in the price of capital will also lower the cost of production, leading the firm to produce more. This is the output effect. If the firm produces more, it needs a larger level of all inputs including labor. This would cause an increase in the demand for labor. The full effect on the demand for labor depends on the relative sizes of the two effects.
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Assume that Nation A's production possibilities is either 30 units of bricks or 50 units of wheat. Nation B's production possibilities is 20 units of bricks and 40 units of wheat. Which of the following is true?
A. Nation A is the least-cost producer of wheat B. The high-cost producer of bricks is Nation A C. The opportunity cost of wheat production is lower in Nation B D. According to the principle of comparative advantage, Nation B should specialize in the production of bricks
The imposition of a tax on a product
A. shifts the demand curve to the right. B. shifts both the supply and the demand curve to the right. C. shifts the supply curve to the left. D. shifts the supply curve to the right.