Question

Macro Postlude Extra Credit 2 for home work 2

Q1: Keeping in mind that investments come in the form of fixed and variable, why then do firms endeavor to continuously replace labor with capital? (1)

Q2: Why don’t economists, in the aggregate, advocate the use of price controls as means of governing prices in the short term (in other words, what do price controls in reality do that’s adversary)? (1)

Q3: Which of the following would be included in the US GDP: (1)

1. Clean up after fires caused by storms
2. Depositing checks at the local bank
3. A Chinese firm building train cars in Springfield, MA
4. Dividends earned on a preferred Amazon stock
5. An estate sale in a big city
6. B & D
7. C & D
8. All of the above

Answer 1

Q1: Keeping in mind that investments come in the form of fixed and variable, why then do firms endeavor to continuously replace labor with capital?

In micro economics, the theories of labor and capital are very important in deriving an optimum combination which allows for maximum revenue to be made by business owners and the value of the shareholders can be maximized.

Over the years, it is an important trend that labor is being replaced by capital and capital intensive machinery. The primary reason for this are concepts such as automation, and advancement of technology which has replaced the need for employees to be hired in large scale while still maintaining an overall level of productivity.

Capital investments on the other hand tend to be relatively permanent in nature and they help in reduction of the marginal costs of a company. Most industries therefore rely on a combination of labor and machinery and the focus on hiring mass labor is gradually decreasing because companies look to reduce the marginal costs and increase overall profitability.

Machines can work 24*7 and therefore in most developed nations labor intensive units are hard to find. Due to the added profits and reduced costs therefore, business owners are shifting their focus to investing in capital intensive units than keeping their focus on labor intensive ones respectively.

Please feel free to ask your doubts in the comments section if any.