5. The owner of Instant Printing, a firm that prints business cards, tells you that as a result
of an increase in the wage rate of printer operators he bas reduced the amount of output
he produces and the amount of capital he uses. How would you respond to this?
(A) You should tell him that this doesn't make any economic sense because according to the
factor substitution effect he should have substituted toward capital and away from labor.
(B) You should tell him that instead of reducing output and the demand for all factors
of production, he should increase output and the demand for all factors of
production so that he can meet the higher labor costs by generating more
revenue.
(C) You tell him that capital must be an inferior input, because he reduced his use of
capital when the price of labor increased.
(D) This scems logical, because the output effect of a factor price increas& would
cause a firm to demand less of all inputs, not just the input whose price increased.
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