Use the following figure to answer the question : Figure 16-1 :shows the isoquants,IQ 1 and IQ 2 ,for a competitive firm.

-In Figure 16-1.The move from point A to point B represents the _____ of an input price change.
A)substitution effect
B)output effect
C)income effect
D)effect of diminishing returns

Question

Use the following figure to answer the question : Figure 16-1 :shows the isoquants,IQ 1 and IQ 2 ,for a competitive firm.

-In Figure 16-1.The move from point A to point B represents the _____ of an input price change.
A)substitution effect 
B)output effect 
C)income effect 
D)effect of diminishing returns

Quizplus · Accepted Answer

The move from point A to point B represents the substitution effect of an input price change because the firm has substituted one input for another in response to the change in relative input prices while maintaining the same level of output. The output level remains constant along the isoquant IQS1U1B0, so there is no output effect. The income effect is not relevant in the context of an input price change. The effect of diminishing returns is a long-run phenomenon related to the marginal productivity of inputs, whereas the substitution effect is a short-run phenomenon related to changes in relative input prices.

Use the Following Figure to Answer the Question : Figure