Land and capital are substitutes.If rent goes up and the amount of capital used goes up,we can assume that the

A) output effect outweighed the substitution effect.
B) the substitution effect outweighed the output effect.
C) the substitution effect and the output effect canceled each other out.
D) there is no way to determine the relative weights of the substitution effect and the output effect.

Question

Brady Sellers · Accepted Answer

Final Answer : B, Explanation :  When land and capital are substitutes, an increase in the cost of land (rent) would typically lead to a substitution effect where firms use more capital instead of land. If the amount of capital used increases when rent goes up, it indicates that the substitution effect (firms substituting capital for more expensive land) outweighed any output effect (changes in production levels that might also affect input use).

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