An increase in the price of one factor (without an equivalent increase in its productivity)will cause employment of that factor to fall, both because of substitution into cheaper factors and because the minimum-profit output may now be smaller.

Question

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When the price of a factor of production increases, producers will try to substitute it with a cheaper factor. As a result, the employment of the expensive factor will decrease. Also, to maintain the same level of profit, producers may reduce their production. Therefore, overall employment may decrease, leading to an increase in unemployment.

An Increase in the Price of One Factor (Without an Equivalent