A change in an input price will alter both production costs and the profit-maximizing output. Thus, a decline in the price of capital will reduce production costs, increase the profit-maximizing output, and thereby increase the demand for labor. This describes the
A)output effect.
B)substitution effect.
C)idea of derived demand.
D)law of diminishing returns.

Question

Quizplus · Accepted Answer

A decline in the price of capital reduces production costs, allowing firms to produce more output profitably, which is the output effect. This increased output can lead to higher demand for labor.

A Change in an Input Price Will Alter Both Production