Question

Consider a firm that uses two inputs: skilled workers and computers. Explain what it means if skilled workers and computers are complements in production. Specifically, if the price of computers falls, and skilled workers and computers are complements, will the firm want to hire more or fewer skilled workers? (2 points)

Answer 1

Two inputs can be complements so that they both are required (perhaps in a fixed ratio) in order to produce a given level of output. In such a case, as here, skilled workers and computers both are needed to conduct business operations.  if the price of computers falls, and skilled workers and computers are complements, then it will not change the quantity of computers purchased by firms because then it will have to hire more labor to operate the same. This is also true because computer cannot displace labor when it is now cheaper as the two are complements. Hence fall in the price of either the skilled workers or the computers will not affect optimum input mix.