Long-Run Input Substitution Due to Rising Wages

Steps:

• Wage increase raises the cost of labor relative to capital.
• Firms aim to minimize production costs by adjusting input mix.
• In the short run, capital is fixed, limiting immediate substitution.
• In the long run, all inputs are variable, allowing capital to replace labor.

Why B is correct:

• According to production theory, in the long run, firms substitute toward the cheaper input (capital) when labor costs rise, as per the isocost-isoquant framework where the optimal input ratio shifts with relative prices.

Why the others are wrong:

• A: Short-run capital is fixed, preventing immediate replacement.
• C: Higher wages make labor costlier, so firms won't substitute toward it.
• D: Substitution moves away from expensive labor, not toward it.

Final answer: B