Mr. X works in the warehouse of a large textile firms located in the United States. The firm outsources the production of its textiles to another nation. Which of the following is an example of the possible substitution effect of this event on Mr. X

Question

Quizplus · Accepted Answer

The substitution effect refers to the shift in demand for a factor of production as a result of a change in the relative prices of other factors. In this case, the outsourcing of production workers reduces the demand for warehouse workers in the United States (as the firm is producing less in-house) and increases the demand for warehouse workers in the other nation where the textiles are being produced. Option A is not an example of substitution effect, as it just talks about increased demand for warehouse workers due to increased sales, which is unrelated to the change in production location.

Mr X Works in the Warehouse of a Large Textile