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How will the substitution effect change the firm

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Reference no: EM133133520

Suppose that a firm facing a downward-sloping demand curve for its output uses only capital and labor to produce its output, and that the firm can always substitute ten units of labor for 1 unit of capital while keeping output constant. Suppose the wage rate is initially $20 per unit and the rental rate of capital is $400 per unit, and the firm employs 600 units of labor. If the wage rate increases to $30 per unit while the rental rate of capital is unchanged,

a. How will the substitution effect change the firm's usage of labor and capital?

b. How will the scale effect change the firm's usage of labor and capital?

Reference no: EM133133520

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