Suppose two goods (X and Y) are being produced efficiently and that the producti

Question

Suppose two goods (X and Y) are being produced efficiently and that the production of X is always more labor intensive than the production of Y. Production depends only on two factors (capital and labor); these may be smoothly substituted for each other. The total quantities of these inputs are fixed. An increase in the production of X and a decrease in the production of Y will increase the capital-labor ratio in each firm. decrease the capital-labor ratio in each firm. leave the capital-labor ratio for each firm unchanged. increase the capital-labor ratio in Y production and decrease the capital-labor ratio in X production. In general, microeconomic theory assumes that firms attempt to maximize the difference between total revenue and accounting costs.

Explanation / Answer

given that production of X is more labor intensive as compared to that of Y that means more labor is used in the production of good X than that of Y. and it also says that labor and capital are perfect substitutes for each other.

Now when production of X is increased and production of Y is decreased, firm falls short of labor for the prodduction of good X adn we have excess amount of capital left with us because of decreased production of Y but because labor and capital are perfect substitutes for each other, firm can use the excess of capital in the production of good X. Therefore, the capital labor ration remains unchanged for the firm. OPTION C

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