Consider Tesla, which produces electric cars. In the long run, cars can be made using a...

Consider Tesla, which produces electric cars. In the long run, cars can be made using a combination of labor and capital. Explain how Tesla’s labor demand curve would change in each of the following situations. (a) Labor and capital are complements, and the price of capital in-creases (b) Labor and capital are gross substitutes, and the price of capital decreases (c) Universities in Texas and California (where Tesla produces cars in the US) improve the quality of their advanced engineering programs. Over the next several years, the productivity of mechanical engineers hired by Tesla increases.

Expert Solution

(a) When Labour and Capital are complements and the price of capital increases.

Labour and capital are complements it means that they have to be used together in the production. If the price of capital increases, then the demand for both capital and labour will decrease since they are used in the production together.

We can see that the demand curve for labour and capital shifts down to a new equilibrium E₁.

(b) When Labour and Capital are gross substitutes, and the price of capital decreases.

This means that the capital and labour can used as a substitute for eache other. One can be use instead of the other. When the price of the capital decreases, then the production firm will use more of capital and less of labour for more output. So the demand for labour will go down. The demand for capital goes up and the production firm increases its usage of capital.

(c) Universities in Texas and California improve the quality of their advanced engineering programs. Over the next several years, the productivity of mechanical engineers hired by Tesla increases.

The production firm will invest more in capital and less of labour for more output since the productivity of mechanical engineers hired by Tesla increases. So the demand for labour will go down. The demand for capital goes up and the production firm increases its usage of capital.

Rahul Sunny answered 2 years ago

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