Monday, August 15, 2011
Suppose a firm is using two inputs, labor and capital. What will happen if the price of labor falls?
I ume that a and b are self explanatory. It may be more difficult to think about why c would also be the case. Think about some of the things that we do in the US. We make cars mostly with robots but those robots are costly to build and maintain but are cheaper than human labor. If labor were cheaper as it is in Korea then we might have a situation where there are a lot more workers to make a car but they still make the same amount of cars as Ford. Since the workers in Korea make less than those in the US they have more labor and they spend pretty much the same to make a car overall and just have less automation.
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