For a competitive firm,with a change in the price of labor,_____ demand curve for labor.
A)the substitution effect reinforces the output effect,leading to a downward-sloping
B)the substitution effect reinforces the output effect,leading to an upward-sloping
C)the substitution effect offsets the output effect,leading to a downward-sloping
D)the output effect offsets the substitution effect,leading to an upward-sloping

Question

Quizplus · Accepted Answer

A change in the price of labor will lead to both a substitution effect and an output effect. The substitution effect is the decision to use more or less labor in response to the change in the wage rate relative to the price of other inputs. The output effect is the impact of the wage rate on the firm's output level. In the case of a competitive firm, the substitution effect reinforces the output effect, leading to a downward-sloping demand curve for labor. This is because when the wage rate increases, the firm substitutes away from labor and toward other inputs, reducing the quantity of labor demanded. Similarly, a decrease in the wage rate would lead firms to substitute toward labor and increase the quantity of labor demanded.

For a Competitive Firm,with a Change in the Price of Labor,_____