If a firm reduces the ratio of capital to labor, it becomes more:
Group of answer choices
A marginal intensive.
B output intensive.
C capital intensive.
D labor intensive.
The correct answer and explanation is:
The correct answer is D. labor intensive.
When a firm reduces the ratio of capital to labor, it is effectively increasing its reliance on labor relative to capital in the production process. This shift means that the firm is using more workers and less machinery or automated systems in its operations.
In production theory, capital refers to the machinery, equipment, and technology used in the production of goods and services, while labor refers to the human effort involved in this process. When a firm moves towards being more labor-intensive, it implies that the firm has decreased its investment in capital and increased its use of labor to produce the same amount of output. This is typically seen in industries or situations where labor is cheaper or more abundant than capital, or where technology and automation are not readily available.
A labor-intensive firm might focus on activities that require human skills, flexibility, and judgment rather than heavy machinery or automated systems. Examples include sectors such as textiles, agriculture, and certain service industries, where manual labor plays a significant role in the production process.
On the other hand, a capital-intensive firm relies heavily on machinery, equipment, and automation to produce goods, minimizing labor input. In contrast, a firm that is capital-intensive would have a higher capital-to-labor ratio.
In summary, when a firm reduces the ratio of capital to labor, it becomes more labor-intensive because it depends more on human workers and less on capital for its production processes. This shift can have various implications for productivity, cost structure, and efficiency depending on the industry and the availability of labor and capital.