The principle of substitution plays a central role in resource allocation because it demonstrates that
A)firms will find it profitable to make abundant use of relatively scarce factors.
B)methods of producing the same commodity will not differ from one country to another.
C)firms can use all factors of production interchangeably with no impact on their costs.
D)prices will be relatively low for those factors for which demand is high relative to supply.
E)relative factor prices reflect relative scarcities of factors in the economy and so firms will find it profitable to make abundant use of relatively abundant factors.

Question

Quizplus · Accepted Answer

The principle of substitution states that firms will substitute the use of relatively abundant factors of production for relatively scarce factors, given that the relative factor prices reflect the relative scarcities of factors in the economy. Therefore, firms will find it profitable to make abundant use of relatively abundant factors, which is why relative factor price plays an important role in resource allocation.

The Principle of Substitution Plays a Central Role in Resource