Question for Thought Suppose the price of capital falls relative to the wage rat

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Question for Thought Suppose the price of capital falls relative to the wage rate and, as a result, the demand for labor increases. Are these inputs gross substitutes, or are they gross complements? What can you infer about the relative strengths of the output and substitution effects? Use the concepts of (a) substitutes in production versus pure complements in production and (b) gross substitutes versus gross complements to assess the likely impact of the rapid decline in the price of computers and related office equipment on the labor demand for secretaries. labor domand ror sd rlarefceent SHOT ON MI 6 Mt DUAL CAMERA

Explanation / Answer

Ans

1 They are gross compliments because demand for both capital and labour increases as price of capital falls. Here output effect is greater than substitution effect such that fall in price of capital doesn't decrease demand for labour

2 if they are pure substitutes fall in price of computers will lead to complete substitution of computers for labour

since they are gross substitutes there is substitution of computers in place of labour

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