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Suppose the capital and labor are compliments in production
Suppose the capital and labor are compliments in production. Assume there is an increase in the quantity of the capital. How will this affect the demand curve for labor?
A. labor demand will shift to the right
B. labor demand will shift to the left
C. Firms will try to avoid using any labor if possible in their production process
D. Firms will try to use an much labor as possible in their production process
Expert Solution
The answer is A.
When there is more capital in production, the firm would demand more labor for any given wage rate. This is because complementarity implies that more labor is necessary to produce more output with the extra capital. For example, when there are more computers, the firm would hire more engineers at any given wage rate to work with the extra computers, because computers alone cannot produce more output (e.g., apps, software, etc.). Therefore, the demand curve, which plots the quantity demanded for labor at given wage, would shift to the right.
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