The demand curve for labor will slope downward because of

Question

Quizplus · Accepted Answer

The demand curve for labor will slope downward due to both the input-substitution effect and the output effect. The input-substitution effect occurs when the wage rate for one type of labor increases, causing firms to substitute other types of labor (or capital) for that expensive type of labor. This substitution results in a lower demand for the expensive labor and a downward sloping demand curve. The output effect occurs when an increase in the wage rate causes a firm to reduce its output because the cost of production has increased. This reduction in output reduces the demand for labor, also resulting in a downward sloping demand curve. Therefore, both A and B are correct.

The Demand Curve for Labor Will Slope Downward Because of