Suppose that land and labor are substitute resources.If the wage rate rose,the employment of land would rise only if

Question

Quizplus · Accepted Answer

If land and labor are substitute resources, then an increase in the wage rate would lead firms to substitute away from labor and towards land, resulting in an increase in the demand and employment of land. This is referred to as the substitution effect. However, there is also an output effect: as the wage rate rises, firms may choose to produce less output as it becomes more expensive to hire labor. The net effect on the employment of land will depend on whether the substitution effect outweighs the output effect. In this case, the best answer is B, as the increase in the demand for land due to the substitution effect is assumed to be greater than the decrease in output due to the output effect, resulting in a net increase in the employment of land.

Suppose That Land and Labor Are Substitute Resources