Your bagel shop uses both capital and labor in the production of bagels. In this production process capital and labor are substitutes. If you install a new oven and the marginal product of capital increases, you will: a. reduce the number of workers you employ

b. increase the number of workers you employ

c. reduce the amount of capital you are using not make any changes since you are already maximizing profit

The answer is option A) reduce the number of workers you employ

Explanation:

Installing a new oven is capital intensive. So, for a business person to incur an additional capital cost to aid the efficiency of production, something has to give.

In this case, where capital and labor are substitutes, installing a new oven will drastically reduce the workload thereby necessitating a reduction in the number of workers.

By implication, the cost of paying wages which is a recurrent expenditure will reduce. In the long run and if the oven is maintained, it will e a very cost effective option.

Installing a new oven also suggests a marginal increment in capital.