Suppose the price of the product that labor is producing increases and simultaneously the price of capital, which is substitutable for labor, decreases. Assuming that the substitution effect is greater than the output effect, the demand for labor
A) will increase.
B) will decrease.
C) may either increase or decrease.
D) will not change.

Question

Quizplus · Accepted Answer

The substitution effect, which is stronger, will lead firms to substitute cheaper capital for labor, reducing the demand for labor despite the increase in product price.

Suppose the Price of the Product That Labor Is Producing