Economics question (1 Viewer)

[Failure_123]

If the cost of Labour rises relative to the cost of capital, what will occur?

Answer is firms will substitute capital for Labour. Wtf? I know it seems like a really easy question, but i'm confused because why would firms choose Labour when its more costly.

 

[gnrlies]

well all other things being equal they would substitute towards capital, so the question is either wrong, or hasn't given enough information.

Perhaps write out the whole question as it might not be as simple as you make it out to be

 

[Failure_123]

It's actually a multiple choice question.

If the cost of labour rises relative to the cost of capital, which of the following is likey to occur?
(a) firms will substitue labour for capital in production
(b) workers will undertake more training and education
(c) the ratio of labour to capital in production will remain unchanged
(d) firms will substitue capital for labour in production

The answer is D....there are a few of these similar questions in sources that i have come across and they're all have the same answer.

 

[gnrlies]

it is [a]

question is wrong

 

[P.T.F.E]

its the wording.
like in maths u use the substitue u for x
here u are using the substitute capital for labour... really bad wording though. especially when they have the vice versa for (a)

 

[gnrlies]

its the wording.
like in maths u use the substitue u for x
here u are using the substitute capital for labour... really bad wording though. especially when they have the vice versa for (a)

Yes, good point.

But (a) is still right given both the rules of grammar and the basic principles of economics.

But I wouldn't worry too much.

 

[wats]

 

[d3st1nyLiang]

wouldnt it be d?

 

[gnrlies]

So as not to exacerbate any confusion I will put it in the simplest terms possible. As P.F.T.E. said it is just a quirk in the way the question is written (in that it can be read to have two completely opposite meanings).

Firms will use more capital instead of labour as the price of labour has risen relative to capital. I'm sure most of you already knew this, but I just want to restate it in case my previous posts were confusing.

 

[chapmabe]

Firms will use more capital instead of labour as the price of labour has risen relative to capital.

Therefore they are substituting capital instead of labour because it's cheaper relatively, therefore the answer is D

 

[mrhorseham]

the answer is (a) wording is a bit bad, but it is saying that firms who are currently using labour for their production, will substitue this labour, for capital equipment.

 

[Steady Eddie]

a) says they will use labour INSTEAD of capital.
Who would do that when labour is more expensive?
It's definatly D

 

[chapmabe]

It really depends on how you read the question, very badly worded? What paper is it from, Catholic trial, independent? Doubt the HSC would be so ambiguous. You can read substitute as replacing labour with capital, i.e. substituting capital for labour, or the other way. depends on how your mind works.

 

[gnrlies]

So long as you understand the intuition behind the answer, then don't worry about this anymore. The wording in the HSC exam will not be able to have mutliple interpretations.