Different firms respond to recessions in different ways. Some will reduce their workforce and produce less in
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Different firms respond to recessions in different ways. Some will reduce their workforce and produce less in response to a fall in the demand for their product. Others may continue to produce at prerecession levels of output but store output they cannot sell immediately. Consider two identical firms for which capital and labor are perfect substitutes in production. During a recession, Firm 1 lays off half of its workforce while Firm 2 does not and continues to produce the same level of output. Would you expect the average product of labor to be higher for Firm 1 or Firm 2? Why?
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