1. Consider a firm for which production depends on two normal inputs capital and labor, with prices w and r, respectively. Initially the firm faces market prices of w = 6 and r = 4. Then both of these prices fall to w = 4 and r = 2. No diagram is necessary for this problem.
2. In which direction will the substitution effect change the firm's employment of labor? Why?
3. In which direction will the scale effect change the firm's employment of labor? Why?
4. Can we say conclusively whether the firm will use more or less labor? Why or why not?