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 willa. increase the capital – labour ratio in each firm.b. decrease the capital – labour ratio in each firm.c. leave the capital – labour ratio for each firm unchanged.d. increase the capital – labour ratio in Y production and decrease the capital – labour ratioin X production

Answer 1

Answer: A -increase the capital – labour ratio in each firm.

Explanation: According to the question above, goods X and Y are produced efficiently. Although production of product X is more labour intensive than the production of product Y.

Due to the fact that production of the two products depends on only two factors which are labour and capital making it easily substituted for each other.

An increase in the production of X and a decrease in the production of Y will increase the capital and labour ratio in each firm as the can be smoothly substituted for each other during production.