How does a profit-maximizing firm that is operating in a competitive labor market respond to an increase in the wage rate?
A) The firm will demand less capital due to the substitution effect.
B) The firm will demand more labor due to the substitution effect.
C) The firm will produce less output due to the scale effect.
D) The firm will demand more capital due to the scale effect.
E) The firm will demand more labor due to the scale effect.

Question

Quizplus · Accepted Answer

An increase in the wage rate raises the cost of labor, leading the firm to reduce its output to maintain profitability, which is the scale effect.

How Does a Profit-Maximizing Firm That Is Operating in a Competitive