Capital substitution driven by rising labor costs

Steps:

• Capital-intensive production increases the capital-to-labor ratio, substituting machines for workers.
• Firms choose this when labor costs rise faster than capital costs.
• Likely triggers include higher labor expenses from wages or unions, or better capital efficiency.
• Interest rates, as capital costs, rising would oppose this shift.

Why A is correct:

• Interest rates are the price of borrowing capital; their increase raises capital costs, making capital-intensification less attractive per basic production theory.

Why the others are wrong:

• B: Higher minimum wages directly elevate labor costs, incentivizing capital substitution.
• C: Greater union power boosts wage demands and labor restrictions, favoring capital use.
• D: Improved capital productivity enhances output per capital unit, encouraging more capital investment.

Final answer: A