Suppose the price of the product that labor is producing increases and simultaneously the price of capital, which is substitutable for labor, decreases. Assuming that the substitution effect is greater than the output effect, the demand for labor
A)will increase.
B)will decrease.
C)may either increase or decrease.
D)will not change.

Question

Quizplus · Accepted Answer

The substitution effect, which is stronger in this scenario, suggests that firms will substitute cheaper capital for labor, leading to a decrease in the demand for labor despite the increase in the product's price.

Suppose the Price of the Product That Labor Is Producing