The substitution effect indicates that a profit-seeking firm will use
A)more of an input whose price has fallen and less of other inputs in producing a given output.
B)more of all inputs if production costs fall.
C)more of those inputs whose marginal productivity is the greatest.
D)less of an input whose price has fallen and more of other inputs in producing a given output.

Question

Quizplus · Accepted Answer

The substitution effect suggests that when the price of an input decreases, a profit-seeking firm will use more of that cheaper input and less of other more expensive inputs to produce a given level of output, as it is a cost-minimizing behavior.

The Substitution Effect Indicates That a Profit-Seeking Firm Will Use