Problem
Now thinking about the long run, suppose that initially Frank's Factory faced a wage rate of $100 per day for production workers and a cost of capital of $66 per day; these prices then fall to $66 and $33 per day, respectively.
1. In which direction will the substitution effect change the firm's employment and capital stock?
2. In which direction will the scale effect change the firm's employment and capital stock?
3. Can we say conclusively whether the firm will use more or less labor? More or less capital? Explain.