Answer to Question #100277 in Economics for Anjali Meena

Question

Suppose a firm has three inputs: unskilled labor, skilled labor and capital. What happens if there is a decrease in the price of the capital when unskilled labor and capital are substitutes and the skilled labor and capital are complements in production.

A) The effect on the employment of unskilled labor remains ambiguous while the employment of skilled labor increases.
B) There would be a decrease in the employment of both skilled and unskilled labor.
C) There would be a decrease in the employment of unskilled labor while the employment of skilled labor may increase or decrease.
D) There would be an increase in the employment of skilled labor and decrease in the employment of unskilled labor.

Answer 1

If there is a decrease in the price of the capital, then the demand for capital will increase, the employment of skilled labor will increase too, and the employment of unskilled labor will decrease.

So, the correct answer is D.