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Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). If the wage rate paid to the pilots increases relative to the rental rate of capital for the airplanes, then:A. Optimal capital labor ratio should increase.
B. Optimal capital labor ratio should decrease.
C. optimal capital labor ratio remains the same
D. Not enough information to answer question

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Answer:

B. Optimal capital labor ratio should decrease.

Explanation:

The capital labour ratio is a measure of the capital intensity of a firm. Usually as firms grow and automate processes, the capital labour ratio increases as they invest more in machinery and other capital assets.

Capital labour ratio is the basis of one sector regional growth model. It states that as labour moves from lower wages cities to higher wages ones, capital labour ratio decreases in stronger regions and increases in weaker regions.

In this instance when the wage rate increases, the denominator increases. This results in a decrease in the capital labour ratio.

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