In an effort to stop the migration of many of the automobile manufacturing facilities from the Detroit area, Detroit's city council is considering passing a law that would give investment tax credits to auto manufacturers. What this means is that it would reduce auto manufacturers' costs of using capital and high tech equipment in their production processes. On the evening of the vote, local union officials voiced serious objections to the law. As a union official, outline the basis of your objection As a representative of one of the auto manufacturers, what are your counter arguments

An investment tax credit encourages business investment. This means that firms will buy more capital units, replacing its labor units. Th laid-off workers will be jobless and unemployment will increase. This must be the argument most likely to be used by union officials against the statute. An investment tax credit will increase Auto-manufacturer's capital-labor ratio thereby making labor relatively more expensive.

Auto-manufacturer's representative would argue that the statute is justified on the grounds of optimal input substitution. He may argue that while some workers do lose their jobs, the refusal to such proposal will induce auto-manufacturers to locate their business in foreign countries where cheap labor is available. In that case, there will be no job for the US workers. Hence, ti is better to have a partial loss of jobs than a complete one.