Final answer:
The question highlights the economic principle that investment in physical capital, such as machinery, can lead to increased labor productivity, especially when the number of workers remains constant. The importance of human capital is also crucial in economic growth, as seen in the recovery of Europe after World War II. Lastly, a firm's production choices between labor and capital are influenced by relative costs, such as labor wages.
Step-by-step explanation:
In the hypothetical scenarios of Hermes and Svarta, where the level of physical capital per worker rises due to an increase in tools per worker, we can see that investment in physical capital can lead to an increase in labor productivity. This is particularly true because the size of each labor force remains constant while the capital increases; each worker now has more tools to use. Firms, in response to union demands for higher wages, might indeed opt for production methods that integrate more physical capital to maintain or increase labor productivity.
Moreover, the importance of human capital in fostering economic growth is highlighted. A powerful workforce equipped with the right technological knowledge can substantially enhance productivity, as was demonstrated during the rebuilding of Europe post-World War II despite massive losses in both human and physical capital.
It is critical to note that the decision around the use of labor and capital in production is often affected by costs. For instance, if a firm's labor costs increase due to higher wages, it may find it more economical to use more machines and less labor. This change in production methods could result in unchanged or even improved levels of productivity.