The wage for workers in a competitive market is initially

The wage for workers in a competitive market is initially $10 and rent, the cost of capital (also rented in a competitive market), is initially $5. Now suppose that wages decrease to $8 and rent decreases to $2.

a) Describe how the scale effect changes a firm’s use of labor and capital.

b) Describe how the substitution effect changes a firm’s use of labor and capital.

c) Overall will a firm hire more or fewer workers? Will a firm rent more or less capital?

d) Will a firm change its production technology has given the changes in w and r?