Suppose that a firm is currently using the optimal bundle of inputs, that is, the point where

MRTSLK=WageRent

or, alternatively,

MPLMPK=pLpK

Assume that both labor and capital have diminishing returns, so that using more of either decreases its marginal product, and that the amount of an input used has no effect on its price.

In each of the following scenarios and with all other things equal, determine whether the firm should

• Increase the amount of labor used and decrease the amount of capital used, or
• Increase the amount of capital used and decrease the amount of labor used.

1. An increase in the workers' wages.