When capital and labor inputs are complements in production, increasing capital re-

sults in a higher marginal product of labor, and vice versa. By contrast, when capital

and labor are substitutes, increasing capital results in a lower marginal product of

labor, and vice versa. In light of this fact, explain why it is that an increase in the

wage reduces the demand for labor but increases the demand for capital when labor

and capital are substitutes, while the demand for capital also declines when they are

complements.

(a) "The provision of health services requires the labor of doctors and nurses. If the

wage rate of nurses increases, while doctors wages are unchanged, the demand

for doctors will increase". True or false? Explain!

(b) The cost of health care is increasing at a rate higher than inflation. One popular

suggestion by policy makers to lower the rate of this cost increase is to (i) rely

more heavily on nurse practitioners instead of primary care doctors for certain

medical treatments and (ii) to lower the average time patients stay in the hospital

and to take care of them at home as soon as possible (in medical lingo this is

substituting "outpatient care" for "inpatient care"). In light of your answer to

question (a), what does this imply about the "production function" of health care

as a function of labor of doctors and nurses?