The input-substitution effect associated with an increase in the wage implies that as the wage increases, a firm will substitute other inputs for the relatively expensive labor.

Question

Quizplus · Accepted Answer

The input-substitution effect suggests that as the wage rate increases, the firm will look for cost-effective alternatives to labor, such as machines or technology, in order to lower their production costs. This is because labor becomes relatively more expensive compared to alternative inputs. Therefore, option A is correct.

The Input-Substitution Effect Associated with an Increase in the Wage